WeWork, the nation’s largest provider of shared office space, is preparing to open its seventh location in New York City's financial district in lower Manhattan as the company targets the Seaport district, an area surging with commercial investment.

The firm, already the largest occupier of office space, has signed a new 15-year lease for 201,231 square feet at 199 Water St., a 1.16 million-square-foot office tower also known as One Seaport Plaza in Manhattan.

When the new location opens this summer, it will be one of the largest WeWork sites in Manhattan, according to WeWork Chief Real Estate Development Officer Granit Gjonbalaj, as well as the company’s seventh in the Financial District. The company has taken five floors for what will be a core location accessible to all WeWork members.

According to landlord Jack Resnick & Sons, the 30th through 35th floors offer sweeping views of downtown Manhattan, New York Harbor and the Brooklyn Bridge.

This deal would create its sixth-largest location within Manhattan, located just one block from its largest Manhattan location at 85 Broad St., where it occupies about 488,000 square feet, according to CoStar data. WeWork has about 5.13 million square feet of office space in Manhattan, according to CoStar.

WeWork chooses its locations based on the level of demand it receives, the company said. But the downtown market has much more available space to accommodate growing firms compared to other areas of Manhattan. It is marked by an office vacancy rate of 9.3 percent, according to CoStar data, compared to about 8 percent for all of the city.

Asked about the popularity of the downtown market for growing tenants, Cushman & Wakefield Managing Principal Lou D’Avanzo said, "If you just run out of space, you’re going to be forced to look downtown because there’s a larger amount of large-block opportunity. There are also smaller boutique office buildings with advantageously priced rents.” said D’Avanzo, an experienced Manhattan office leasing executive who was not involved in the WeWork deal.

WeWork is not the only firm that will set up shop at One Seaport Plaza this summer. The American Foundation for Suicide Prevention, a non-profit, is relocating into 24,495 square feet on the 11th floor of the building when it relocates in June from nearby 120 Water St., where it occupies nearly 12,000 square feet, per CoStar data.

Concurrently, marketing firm W2O Group has signed for 58,852 square feet in a long-term renewal that also expands its presence from about 35,000 square feet it already has on the 14th floor to new space on the 12th floor of the building.

Resnick & Sons President Jonathan Resnick said 199 Water Street has had a “swift lease-up” following a recent major renovation that upgraded lighting and other critical building systems, including a detachable floodgate system for flood protection. It has gut renovated the lobby to feature oil paintings by artist Frank Stella and installed glass security turnstiles and new elevators.

The 35-story tower, developed in 1984 by Jack Resnick & Sons and owned by the company since, is once again fully leased following the recent transactions. Other tenants in the building include Allied Wold Assurance Company, The Legal Aid Society, and BGC Financial LP.

The Financial District, and particularly the Seaport area, has been undergoing a wave of capital investments, both from public and private spheres. The city has invested about $15 million in the past four years into lower Manhattan, including the seaport, for infrastructure improvements, including flood protection measures.

The Howard Hughes Corp., a Dallas-based developer, is spending $1.7 billion to redevelop a swath of parcels into a neighborhood dubbed The Seaport District, which is opening in phases to create 500,000 square feet of commercial, entertainment and dining spaces. As part of those efforts, Howard Hughes paid $180 million in June for a parcel at 250 Water St. to round out its holdings. One of the Seaport District’s properties, called Pier 17, is already open with 19,000 square feet of space leased to sports network ESPN for its television studios.

Other investors are also entering the area, including Irvine, California-based hotel operator Atlas Hospitality Group and New York-based developer Fortuna Realty Group. In January, they secured $40 million from Bank of America Merrill Lynch to begin building a 26-story hotel with retail space nearby at 120-122 Water St.,which is expected to open in 2020.

“With billions having been invested in infrastructure here, Financial District commercial landlords are poised to capitalize on the area’s convenience to the increasing [and increasingly affluent] residential populations in Lower Manhattan, Brooklyn, Long Island City and along the Jersey Gold Coast,” CoStar analysts wrote in their most recent Financial District office report. “Also encouraging for Financial District commercial landlords are recent and forthcoming projects like Westfield’s World Trade Center mall and the South Street Seaport redevelopment.”

For the Record: Adam Rappaport and Brett Greenberg with Jack Resnick & Sons, Inc. represented the landlord in-house along with a Cushman & Wakefield team of John Cefaly, Myles Fennon, Ethan Silverstein, Stephen Bellwood and Robert Constable. WeWork handled lease negotiations in-house.

FEBRUARY 19, 2019

Payless ShoeSource began liquidation sales at its U.S. stores over the weekend before filing for Chapter 11 bankruptcy protection for the second time. Photo: Wikimedia Commons

Payless ShoeSource filed for Chapter 11 bankruptcy protection in what could be the largest such filing in the nation's history, with the chain planning to close all 2,500 of its U.S. corporate stores and its online business amid a shift in consumer shopping behavior that's upending retailers nationwide.

The Topeka, Kansas-based seller of discount shoes for men, women and children began going-out-of business sales Sunday in anticipation of this week’s bankruptcy filing.

“We expect all stores to remain open until at least the end of March and the majority will remain open until May,” the company said in a statement.

The notice alone almost doubles the number of closings that all U.S. retailers announced in the first six weeks of this year, according to Coresight Research. The global market research firm reported last week that 2,187 stores were scheduled to go dark this year, up 23 percent from the year-earlier period, and noted that “there was no light at the end of the tunnel.”

The Payless move, which does not affect its franchise operations or international business, comes barely 18 months after Payless emerged from a Chapter 11 bankruptcy filing, a process that is still unfolding in court. Some 1,200 stores will remain open in Latin America, the company said.

Founded by two cousins in 1956 as a no-frills, self-service retail model, the shoe seller had already closed almost 900 stores during the 2017 bankruptcy filing, which wiped out more than $435 million of its $838 million in debt and left it with 3,500 stores throughout the world.

In this week’s filing, Payless said it had about $470 million in outstanding debt, much of it owed to Chinese-based footwear makers.

“The challenges facing retailers today are well-documented, and unfortunately Payless emerged from its prior reorganization ill-equipped to survive in today’s retail environment,” Chief Restructuring Officer Stephen Marotta said in a statement. “The prior proceedings left the company with too much remaining debt, too large a store footprint and a yet-to-be realized systems and corporate overhead structure consolidation.”

Owned by a private-equity partnership, Payless restructured almost half its debt in the 2017 filing through a credit bid that gave lenders equity stakes in the company in exchange for debt forgiveness. That is similar to the Sears Holdings bankruptcy exit structure. When Payless emerged from Chapter 11 on Aug. 10, 2017, its future looked bright, according to the company.

Unfounded Optimism

"In a year where so many major retail companies have filed for Chapter 11 restructurings, Payless is the first to successfully emerge as a stronger and healthier enterprise for the benefit of its customers, employees, suppliers, business partners and lenders," Chief Executive Paul Jones said in a statement at the time. He also announced then that he was retiring.

"Our new owners believe wholeheartedly in the future of Payless,” he added, “and I am confident that they will identify a new leader who will complement our outstanding and deeply committed management team, while sparking new ideas and approaches.”

That never happened. Martin Wade, Payless’ chairman, has served as interim chief executive since then. The company struggled with inconsistent pricing, a mixed message to consumers and what Coresight Research called “the relentless share gains” of e-commerce disruptors.

Like a number of merchants, Payless has faced the challenges of what is amounting to a revolution in retail. Consumers have a number of choices both in-store and online at a variety of prices. That has forced retailers to rethink their selling strategy as well as their delivery. As the landscaped shifted, many retailers have closed shop, leaving a number of malls and shopping centers in dire straits even during a period of high consumer spending and demand.

As a no-frills, self-service model, Payless may have struck out on the “experience” so many consumers search for when shopping. It also probably didn’t help that many Payless stores were in strip malls or smaller Class B shopping centers, neighbors of other struggling retailers like Sears, Kmart and J.C. Penney.

Payless also was likely to have found itself in a grim position with the January bankruptcy filing of Shopko , the Green Bay, Wisconsin-based regional discount retailer. Since 1999, Shopko has leased the floor space to Payless as the discounter’s shoe department. Shopko said it would close 38 stores this year; last year it shut 45 stores.

A second bankruptcy filing – what attorneys refer to as Chapter 22 – underscores how difficult it is in this milieu for retailers to maintain solid footing even after they’ve restructured debt and lightened the store load.

Just last month, Gymboree Group made its second appearance in bankruptcy court in less than two years. Gymboree is shutting down 809 apparel stores focused on children, mostly because “today’s changing retail environment has proven to be our greatest challenge,” Chief Executive Shaz Kahng said in a letter to employees and customers.

Besides Gymboree, Charlotte Russe and FullBeauty Brands have filed for bankruptcy this year.

Coresight Research warns of more big bankruptcies ahead. Since 2013, there have been 72 bankruptcy filings in the consumer discretionary sector, moving into double digits in 2017, when there were 20.

And this has happened during what is considered “peak retail,” when high employment, rising wages and strong GDP growth spur consumer spending. U.S. retail sales grew 4.6 percent last year, according to the National Retail Federation.

“Surprisingly, extreme disruption continues in the retail sector amid a time of bounty,” according to Coresight. Researchers also noted “the annualized number of filings year-to-date in 2019 [is] already outpacing the number in 2018,” which was 18.

FEBRUARY 12, 2019

The government of Norway, an active buyer and seller of U.S. commercial property, is shifting its strategy to focus more on stocks, bonds and other securities as a way of diversifying its holdings.

A new investment mandate calls for the country's Government Pension Fund Global, known as GPFG, to move more toward securities of companies and investment funds instead of properties. It has more than $1 trillion in assets and is the world's second-largest pension fund behind Japan's Government Pension Investment, according to global insurance brokerage and advisory firm Willis Towers Watson.

To characterize the mandate as abandoning property investments would be wrong, Egil Matsen, deputy governor of Norges Bank, the investment manager for Norway's pension fund, said in a statement.

"We would like to emphasize that real estate will continue to be an important part of the bank’s investment strategy for the GPFG, and the fund will be a major player in the real estate markets in the years to come," Matsen said.

The objective is to have a real estate portfolio in the range of 3 percent to 5 percent of the fund's investment, he said. Properties, which are identified as unlisted investments, now make up about 2.7 percent of the fund's investment, with real estate securities, bonds and stocks, identified as listed investments, at about 1 percent.

The difference going forward will be that there will be no specific limit as to how much listed real estate the fund may hold. In recent years, the listed real estate market has grown rapidly, and the restrictions on the portion of the voting share in listed real estate companies that GFPG may own have been changed so that the GPFG can hold larger stakes. This may facilitate better diversification of the real estate portfolio across real estate sectors.

The significance of the change is evident in the fact that Norges Bank has decided to discontinue Norges Bank Real Estate Management, which has overseen its property investment strategy, as a separate organization. Going forward the property real estate organization will be integrated into Norges Bank Investment Management and report to a new chief executive.

"The real estate organization has been built up as a professional organization that has made investments that will benefit generations to come. Their competence is something that Norges Bank wants to benefit from going forward," Matsen said.

Behind the change is the fact that real estate has not been that strong of performer for the fund of late.

Investments in property real estate returned 1.9 percent in the third quarter of 2018, the latest reported. Investments in listed real estate returned just 0.1 percent.

The return on unlisted real estate investments depends on rental income, operating expenses, changes in the value of properties and debt, movements in exchange rates, and transaction costs for property acquisitions and disposals.

However, the fund has experienced other uncertainty in producing returns – unforeseen costs.

In a letter to Norway's Ministry of Finance, Norges Bank officials said, "recent years' experience with unlisted real estate investments shows that such investments may be complex and resource-intensive."

"The real estate portfolio shall be broadly diversified, and the strategy shall be simple, with weight given to cost-efficiency and investments that require limited resources," Norges Bank officials said.

In January, a partnership between Norges Bank Real Estate Management and Prologis acquired six logistics properties in Chicago, Nashville in Tennessee and Orlando, Florida, containing 2.8 million square feet. Norges Bank paid $87.7 million for its 45 percent interest.

A month earlier, a partnership between Norges Bank Real Estate Management and TH Real Estate sold the office property at 470 Park Ave. South in New York. Norges Bank received $122 million for its 49.9 percent ownership interest.

In the month before that, Norges Bank Real Estate Management acquired a 45 percent interest in an office property at 121 Seaport Blvd . in Boston, in a joint venture with a new partner, American Realty Advisors. Norges paid $204.8 million for its 45 percent ownership interest, valuing the property at $455 million.

Facebook's Reach Felt in Office Design Nationwide

FEBRUARY 06, 2019

A scale model of one of the buildings on Facebook's Menlo Park campus gives a bird's-eye view of the open floor plan concept used in the company's offices. Photo: Gregory Cowley

Just as Facebook has seeped into daily life for billions of users, elements of its strategically designed headquarters in Menlo Park, California, are influencing offices across the country. As a result, a financial firm in the U.S. Southeast can look a lot like a Silicon Valley startup.

Amped-up amenities at Facebook headquarters such as pastry chefs, laundry service and Wi-Fi enabled rooftops with lush landscaping serve two purposes: They help the company squeeze as much time at work as possible out of its employees. And they provide highly desirable perks to attract and retain workers in a competitive job market.

The social media company, as well as other Silicon Valley tech giants such as Google and Apple, began incorporating these ideas into their workspace years ago as a way to compete for the skilled workers they needed -- and keep them at work for long stretches. As the companies' prominence has grown, competitors across the country followed suit, hoping to keep pace with the industry’s standard bearers and attract top-shelf talent. Today, in tech-heavy markets everywhere, it’s difficult to walk into a tech company’s office without seeing a ping-pong table or a keg of beer waiting for happy hour.

But those elements have reached out even further to become of the gold standard for office space development and renovation in buildings nationwide. Companies across industries are vying for the same workers, who have become more amenable to long office hours when they are in locations they enjoy.

“It has proliferated out all the way to financial companies in Atlanta,” said Ryne Raymond, West Coast lead of workplace strategy for Los Angeles-based commercial real estate firm CBRE Group Inc.’s workplace strategy division. “In this economy at the moment, you see these companies being hyper-competitive for talent, and they want to get the best work out of their employees."

It's not just tech workers these businesses are seeking. It's everyone from advertising and sales workers to accountants and lawyers, all of whom could get hired by Facebook as easily as they could by accounting firm Deloitte.

Among the biggest areas of focus in Facebook's offices is developing connection, which is of the utmost importance at Facebook, said Ryan Patterson, strategic initiatives manager for the social networking company founded 15 years ago this week. Employees sit in large pools of desks, just an arm’s reach from their co-workers and gather for lunch in the campus’s many eateries. Through its rooftop garden winds a path where workers are encouraged to hold “walking meetings.”

Kay Sargent, senior principal and director of workplace at Washington, D.C.-based architecture and design firm HOK, said "a lot of companies are looking to be more like tech, because more companies consider themselves to be tech. Such a huge portion of their business is driven by tech. They're all trying to hire people who are tech savvy, so they have to be able to compete for that talent."

Countless studies by architects and designers have demonstrated a link between these new-age workplaces and employee innovation, including a 2016 study by global architecture firm Gensler that shows that the employees with the highest levels of workplace effectiveness have access to twice as many amenities as their less effective counterparts.

Open Space Distractions

But as these new trends have become more popular, they have also garnered critics who say open floor plans breed distraction and degrade worker privacy. Companies now designing offices are encouraged to use a more nuanced approach, Raymond said.

“It’s about finding the right balance,” he said.

A good sweet spot is having between 30 percent and 40 percent of the office space enclosed, Raymond said, but with that space more evenly distributed than in older offices designs where individual offices are the norm.

Some companies find that allowing employees to make use of "activity-based" space, rather than tethering employees to a specific desk, is more effective, Sargent said. Activity-based workspaces create task-oriented spaces that workers can choose based on what job they're trying to carry out at the moment.

Activity-based workspace "environments are typically designed to be an ecosystem of spaces, primarily grouped to serve four major work functions: Solo work, collaboration, learning and socialization and rejuvenation," Sargent wrote in a 2017 article about new workplace design concepts for Work Design Magazine.

Companies are also trying to cater to workers who differ vastly in age, workplace preferences and life stages, so it makes sense to include a variety of different options within one office, Sargent said.

Facebook, for its part, is committed to the open floor plan idea, though it did provide some quieter spaces in its new building, and many aspects of its huge campus could be classified as activity-based workspaces.

“In this building, we made some design updates. We added some mezzanine space into this building,” Patterson said, sitting in MPK 21, the second phase of the company’s three-building headquarters expansion in Menlo Park.

“It's sort of a balcony-level type space that has lower ceilings and sort tucks in the sides of the building and it works for groups that need a little bit more focused workspace and don't work as well in sort of the open concept," he said. "But we believe that the benefits of the open concept really outweigh any of the negatives.”

JANUARY 30, 2019

Philadelphia is home to the One Franklin Town complex, the largest apartment project supporting a new Brookfield-related bond offering. Photo: Bob Snyder, Flickr

The single-borrower market for commercial mortgage-backed securities is off to a strong start this year due largely to a major real estate investment trust merger as investors turn to more secure deals.

Brookfield Asset Management completed the $11.4 billion acquisition of Forest City Realty Trust in December. The purchase consisted of 6.3 million square feet of high-quality office space, 2.2 million square feet of retail space, 18,500 multifamily units, and five large-scale development projects.

Now this month, lenders on that deal have dominated the market, rolling up $2.43 billion of those loans into three bond offerings. Those three deals along with a fourth single-borrower deal has pushed the January single-borrower total so far to $3.07 billion.

That's ahead of the pace at this time last year of $2.29 billion. Last year's activity through the same time included nine smaller deals.

Two other single-borrower deals are in the pipeline for issuance, which should keep the pace ahead of last year.

As the commercial mortgage bond market has shown in the past two years, there is a shift toward single-asset, or single-borrower, deals.

The 335-unit One Franklin Town complex in Philadelphia is the largest multifamily project supporting a new Brookfield-related bond offering. Photo: Brookfield Properties

Single-borrower bond offerings have become popular with investors partly because on an overall basis, institutional borrowers with higher quality assets are a large part of the sector. That means the bonds historically have lower default rates.

In addition, single-borrower deals have a higher percentage of financing with loan-to-value ratios greater than 60 percent, which is an enticement for borrowers. Such deals also offer borrowers longer terms with more extension options.

Multiple lenders on the Brookfield and Forest City deal contributed loans to the three offerings this year. Citigroup, Barclays Bank, Bank of America, and Deutsche Bank contributed office loans to two deals.

The collateral for the CAMB 2019-LIFE bond offering is a $1.17 billion mortgage loan secured by eight life science properties totaling 1.3 million square feet of Class A office and laboratory space on the campus of the Massachusetts Institute of Technology. The capital includes debt of $130 million subordinate to, and held outside, properties that were initially developed by Forest City.

The collateral for NYT 2019-NYT bond offering is a $515 million loan on the office and retail condominiums of the New York Times Building in Manhattan. The office condominium consists of floors 28 through 50, while the ground-floor retail condominium is 738,385 square feet.

The third bond offering this month tied to the merger is a $745.86 million pool of mortgages offered through Freddie Mac. Wells Fargo contributed to loans secured by 23 multifamily properties.

Millennials Now Pushing a Wider Group of Cities Toward Transit-Based Transformation

JANUARY 15, 2019

By Lou Hirsh

Lifestyle Priorities Change Urban, Suburban Centers

A new trolley station under construction in San Diego will link riders to the next-door Westfield UTC mall. Illustration: San Diego Association of Governments

They may not yet be cities that never sleep but San Diego and other metropolises across the country are building centers around train and bus lines in an effort to transform central business districts from after-work ghost towns into magnets for millennials.

Developers and planners are seeking to create areas where people can spend at least 18 hours a day at home, work and in stores, restaurants and venues in hopes of building a critical mass that attracts more jobs, entertainment, shops, eateries, apartments and the millennial demographic with its disposable income, analysts and executives say.

The rise of millennials, a generation of more than 80 million adults ages 22 to 37, in the workforce is spurring investors’ increasing confidence in the emergence of these all-day cities as a driver of future development, according to a 2019 real estate trends report from development research organization Urban Land Institute and consulting firm Pricewaterhouse Coopers. They largely focus on generally urban and suburban markets outside of the largest U.S. coastal cities, long considered "gateway" markets by national and global investors.

Among the top changes in these smaller markets, stretching from California to Florida, developers are considering how to put vehicle-centric elements such as streets and parking lots to better use over the long haul as bike and scooter lanes, ride-hailing apps and self-driving technologies overtake car ownership as the preferred transit modes.

San Diego in particular is working on a $2 billion expansion of its light-rail trolley system that when completed in 2022 will connect one of its most vibrant employment hubs -– University Town Center, known as UTC, and the next-door University of California San Diego campus -– directly with neighborhoods in the region’s South Bay area, currently home to the largest supplies of relatively affordable housing.

New stops along that northward extension of the trolley’s Blue Line should, in theory at least, alleviate chronic traffic congestion and provide opportunities to form new 18-hour clusters of activity spurred by new housing and commercial elements, provided local neighborhood objections to higher-density projects can be overcome.

"I don’t think San Diego understands yet how important the Blue Line extension is to our urban future," said developer Andrew Malick, a director at San Diego-based Malick Infill Development, during a recent trends forum presented by the local chapter of the Urban Land Institute, a Washington, D.C.-based research organization focused on urban planning and development issues.

"Anybody who has driven from the Chula Vista-South Bay market up to the work centers in Sorrento Mesa and UTC, knows that if there was another option to sitting in that traffic, they’d take it," Malick said.

Paul Jablonski, chief executive of the San Diego Metropolitan Transit System, which oversees the trolley, said he’s already hearing enthusiasm from hospital employers in the University Town Center-University of California San Diego area about the coming trolley extension completion.

"Their demand for technical professionals is so high," Jablonski said, adding those hospitals and other employers in northern San Diego see the chance to better retain and recruit workers who now commute across crowded freeways from areas to the south where housing is more affordable.

Suburban Demand

Ed McMahon, a senior fellow in the Washington office of the Urban Land Institute who's focused on sustainable development and environmental policy, noted that nine of this year’s top 10 U.S. cities viewed by investors as markets to watch in 2019, and 17 of the top 20, are considered likely to become 18-hour cities if they haven’t already reached that status.

The list includes Dallas and Austin in Texas, Orlando and Tampa in Florida, the Raleigh/Durham area of North Carolina, and Nashville, Tennessee.

Millennials shaped many of the urban core development priorities of the past decade, and their influence is expected to shift to the suburbs as that age group marries and raises children. One result, said Silvergate Development Principal Ian Gill, is that he would "love to be doing more transit-oriented development," especially in suburban areas where land and other costs are often lower than in urban core neighborhoods.

Larger U.S. multifamily developers, like South Carolina-based Greystar, are finding that transit orientation is not only a priority among tenants, but it also helps in garnering city and lender approvals for projects.

"It's really tough to get a deal done these days that isn't transit-oriented," said Jim Ivory, senior development director at Greystar, which is now under construction on a high-end University Town Center apartment complex and is currently leasing its recently opened Park 12 in downtown San Diego’s burgeoning East Village, near a major trolley stop.

"It only makes sense to locate your housing next to transit," Ivory said, even in the case of luxury projects. "Residents will use transit if it works for their life."

To become smoother-operating hubs of activity, these 18-hour cities will need to deal with some of the downsides of consumer trends like e-commerce. McMahon said he thinks that “free shipping” is actually a misnomer when it comes to urban functioning because items ordered online are now clogging streets with package delivery trucks at all hours of the day in many major cities.

He said shipping firms will need to adjust, making more deliveries at night and using more cargo-carrying bicycles for short-hop deliveries within urban centers. Also, McMahon said cities and developers will need to plan for the day when many parking lots and garages become obsolete as more people eschew driving cars in favor of ride-hailing services like Lyft and Uber, and eventually self-driving vehicles.

Many developers, he said, have already begun planning new projects so parking garages can be easily converted later to other uses, like offices, apartments and retail. New parking decks, for instance, need to minimize elements like slanted surfaces that could make future conversions difficult.

"Joni Mitchell sang about how we took paradise and put up a parking lot,” McMahon said. “One of the big opportunities is taking those parking lots and turning them back into paradise."

JANUARY 14, 2019

A mixed-use project would be built on the site of the live music venue the Viper Room on Sunset Boulevard in West Hollywood, California. Illustration: Morphosis Architects.

The site of the Viper Room nightclub, popular for its celebrity owners, performers and visitors, may soon be known for another reason: a developer plans to build a D-shaped structure partially covered in greenery with a hole in the middle that's unlike any other building on the famous Sunset Strip in West Hollywood, California.

Developer Silver Creek Development Co. submitted a proposal to the City of West Hollywood that includes a 15-story building with a 115-room hotel and 31 market rate condominiums plus 10 affordable apartments, according to city records. The project would make space for a new iteration of the Viper Room with a 3,300 square-foot space on the ground floor that has an entrance on Sunset Boulevard, according to the proposal filed with the city.

The club, which opened in the early 1990s at 8852 W. Sunset Blvd. , is now an unassuming single-story structure with stucco exterior walls painted solid black that is identifiable by small white letters on a black canopy over its front door. But the Viper Room, just blocks from other prominent Sunset Strip clubs such as the Roxy and Whiskey a Go Go, developed a dedicated following of Hollywood's A-listers in its hey day, included actor Johnny Depp as an owner, and its stage has been graced by some of the music industry's chart-topping talent, from Johnny Cash to the Pussycat Dolls. It's also the site where actor River Phoenix died in 1993.

Renderings of the proposed project show the D-shaped structure will be made out of two towers, one covered in greenery at the bottom of the opening in the middle. The development, which could total 240,000 square feet, calls for restaurants on the ground floor, a banquet hall on the second floor and a gym, spa and terraces, and at least one swimming pool, according to the application.

The proposal is already getting mixed reviews from observers and residents.

“It is great that they intend to keep a club and call it the Viper Room, but it is unlikely to have the same vibe as the original,” Elyse Eisenberg, chair of the West Hollywood Heights Neighborhood Association, said in an email, adding that she would prefer to see more creative office space on the Sunset Strip than another hotel.

But others feel the project could also bring some much-needed amenities to the area.

“If they could go up 15 stories and take advantage of the amazing views on Sunset Boulevard, I think a hotel on the Viper Room site would be fantastic,” said Bob Sonnenblick, principal at Brentwood-based Sonnenblick Development LLC, who is not involved in the deal.

Sonnenblick said hotels in the area, popular with tourists, are doing very well. However, he cautioned that more development could increase traffic on Sunset which “is already bad,” he said.

“Traffic up there is going to become horrible,” he said. “It will be probably with anything that is built up there,” and not just at this particular site.

The project is now under an initial 30-day review after which the City of West Hollywood will hold a neighborhood meeting for those who live within 500 feet of the project site, according to John Keho, interim director of the planning department at the City of West Hollywood.

The developer has requested to amend the Sunset Specific Plan, demolition permits, development permits and two conditional use permits to sell alcohol on site.

“It’s going to be a long process,” Keho said.

Beverly Hills-based real estate investor 5th Gear LLC sold the property , at 8852 Sunset Blvd. in West Hollywood, for $80 million last June to Scottsdale, Arizona-based real estate investor 8850 Sunset LLC, which is represented by Scottsdale, Arizona-based real estate investment company REM Finance Inc., according to CoStar data. It was sold as part of a four-property portfolio that includes 8850 to 8860 Sunset Blvd.

The storefront building dates back to 1921, according to CoStar data. Current businesses on site, which include Aahs! The Ultimate Gift Store, Terner’s Liquor and Sun Bee Liquor and Deli, would be demolished for the proposed development.

Morphosis, an architect in Culver City, California, is working on the project. West Hollywood-based real estate company Plus Development Group is the project manager, according to Mick Unwin, director at Plus Development.

JANUARY 07, 2019

Vacated property in St. Paul, Minnesota, is among the commercial real estate benefiting from the federal Opportunity Zone program. Photo: Doug Wallick, flickr

The federal Opportunity Zone tax break initiative designed to boost distressed areas is giving a boost to some vacated department stores across the United States.

Sales of vacant department stores in opportunity zones spiked almost 50 percent in 2018 from 2017, when the program became law. The increase stems partly from tax incentives doubling the value of properties in distressed areas through construction or redevelopment. Sales of this type of property that's not eligible for the tax incentives fell 20 percent, according to CoStar Group data.

The incentives and the subsequent sales trends have increased the prospects for the sale of other empty anchor stores in federally designated opportunity zones, according to real estate executives.

"We're seeing massive interest in these incentives among high-net-worth investors and diverse real estate funds alike," said Emilio Amendola, co-president of A&G Realty Partners, a firm that specializes in advising retailers going through bankruptcy reorganizations. "They offer capital gains tax reductions of as high as 15 percent, and holding for a full 10 years can yield a capital gains tax deduction of 100 percent. On top of that, many Opportunity Zones nationwide are in gentrifying areas with strong growth potential."

A&G Realty is auctioning 10 department store properties formerly owned by The Bon-Ton Stores, on Jan. 28 in New York. With stores ranging in square footage from 45,000 to 165,000, the available assets include stores in Iowa, Pennsylvania, Michigan, Minnesota, Indiana and Illinois.

Three of the properties are in the new qualified opportunity zones, which were created by the Tax Cut and Jobs Act of 2017. The first, Herberger's in downtown St. Cloud, Minnesota, spans 93,900 square feet among two stories on a 1.33-acre lot. "Finding a new use for this space is a top priority for St. Cloud economic development officials, which highlights the potential for public-private collaboration," said Michael Jerbich, a Chicago-based principal at A&G Realty.

Another qualifying property is Herberger's at Midway Marketplace in St. Paul, Minnesota, on 124,136 square feet spread among two stories on a 6.65-acre lot. "This property has light rail directly behind it and is a quarter mile from the $250 million Allianz Field soccer stadium now under development," Jerbich said. "The consensus in the market is that Midway represents a tremendous redevelopment opportunity."

The third site is Younkers at Coral Ridge Mall in Coralville, Iowa, with 98,458 square feet across one story on a 9.1-acre lot. Located in the Iowa City market, this Brookfield-owned property draws on the more than 80,000 students and employees at the University of Iowa.

Younkers at Coral Ridge Mall in Coralville, Iowa. Photo: CoStar

"The large-format spaces on auction here are rife for reinvention and repurposing, and the sale also represents a tremendous opportunity for market penetration in these areas," Jerbich said.

In May 2018, A&G Realty was retained to dispose all real estate assets of The Bon-Ton Stores on behalf of a joint venture between Great American Group, Tiger Capital Group, and Bon-Ton's Second Lien Noteholders.

"To date, 13 fee-owned and seven leased properties have been successfully sold to storage users, developers/investors, fitness centers, a casino, home furnishings retailers, and health care users, to name a few," Jerbich said.

So far, however, none of the 20 completed deals was for properties in opportunity zones.

"Considering the contraction of the department store sector, the overall results of our sale efforts for Bon-Ton's properties to date have been in line with our expectations," A&G Realty's Amendola said. "Most of Bon-Ton's sites were leased and, with economic terms that largely failed to resonate with the marketplace the overwhelming majority of these leases were ultimately rejected and returned to the landlords."

Amendola added that "we knew that this was going to be a challenging project and, based on the uses we've seen for the 20 locations that were sold thus far, it's clear that forward-thinking developers and investors largely view this as an opportunity to introduce different concepts to their properties."

As 2018 ended, the U.S. Bankruptcy Court overseeing the restructuring of Sears Holdings approved the hiring of A&G Realty to oversee that retailer's lease restructuring and property sales.

A&G Realty said they are not at liberty to discuss what they are working on regarding the Sears real estate at this time or which of the Sears properties are in opportunity zones.

According to CoStar data, Sears currently has more than 100 Sears or Kmart stores in opportunity zones, including eight that were among the 80 stores Sears announced at year-end they were closing by March.

Sears stores in opportunity zones have already sparked some interest from investors.

Last May, Northwood Investors, a privately held real estate investment adviser founded by John Z. Kukral, the former president and CEO of Blackstone Real Estate Advisors, acquired a 181,000-square-foot Sears store in Gaithersburg, Maryland, for $4 million.

In the following month, Capri Investment Group, a Chicago-based real estate investment management firm, acquired a 157,000-square-foot Sears store in Los Angeles for $23 million. Capri plans to redevelop property along with a neighboring center into a mixed-use project including housing.

Federal Opportunity Zones Fail in Key Areas, Groups Say

DECEMBER 17, 2018

Activists Argue Only Two in 100 Zones Can Deliver Results as Billions of Dollars Flow To Distressed Areas

President Trump signs an executive order setting up a White House Opportunity and Revitalization Council. (White House photo by Tia Dufour)

Just as President Donald Trump signed an executive order designed to add muscle to the federal Opportunity Zones tax break initiative, an analysis emerged showing only two in 100 of the economically distressed areas targeted for property investment meet community activist goals for financial success.

A new report by Smart Growth America, a coalition of community advocacy organizations, ranked the nation's nearly 8,700 zones for their potential to deliver on benefits for communities, the environment, and investors, or what it calls the triple bottom line. The initiative was part of the tax law Congress passed late last year to give tax breaks on capital gains investors reap through investments in real estate in areas the government labels economically distressed.

Based on the group's analysis, only 2 percent of the zones can deliver on that triple bottom line. The report notes that there is enormous concern among local policymakers and community groups concerned the tax incentive will fund disruptive gentrification, displacement and accelerate climate change.

The importance of the initiative's success is growing as increased investment pours into real estate through the program. A closer look at the commercial property investment sales activity and pricing in the zones in the neighboring Washington, D.C., and Baltimore markets, for example, shows that as in other areas, there has been a huge surge in deal volume in those areas this year after the program took effect compared to 2017, according to CoStar data.

It is unclear whether that surge has produced tangible improvement in property values to this point. Sales volume of commercial, multifamily and land properties has skyrocketed in 2018 to $1.39 billion from $855 million last year. Even so, the data show mixed results on what has been happening to property values in those deals.

The average sale price paid per square foot or unit were lower this year for land, retail and multifamily deals, specifically 40 percent less for land; an 11 percent reduction for retail; and a 5 percent drop for multifamily.

One of the primary goals of the initiative is to improve the access to affordable housing in these zones in economically distressed communities. To this point at least, the property types benefiting most from the surge of investment in the Washington and Baltimore zones were nonresidential properties. Industrial property pricing was up 28 percent and office property prices gained 11 percent.

At a White House executive order signing ceremony establishing the White House Opportunity and Revitalization Council on Dec. 12, Trump said "the resources of the whole federal government will be leveraged to rebuild low-income and impoverished neighborhoods that have been ignored by Washington in years past. Our goal is to ensure that America's great new prosperity is broadly shared by all of our citizens."

Disparity Concerns

Housing and Urban Development Secretary Ben Carson will lead the new council.

Also at the signing ceremony was Darrell Scott, a pastor and member of Trump's executive transition team.

"For decades, job growth and investment have been concentrated in a few major metropolitan areas. This has created a geographic disparity — a very big one, in many cases — where some cities have thrived, while others have suffered chronic economic and social hardship," Scott said. "With opportunity zones, we are drawing investment into neglected and underserved communities of America so that all Americans, regardless of zip code, have access to the American Dream."

It will probably take a longer track record before a consensus is reached on whether the new tax initiative narrows that disparity. Not all of the zones are created equally for new business or real estate investments, according to the Smart Growth America report.

The majority of the designated zones could be described as low density, drivable suburban areas with significantly higher housing and transportation costs, higher greenhouse emissions and lower quality of life, according to the report.

Despite this, 98 percent of the designated zones failed to reach the minimum score of 10 to be determined a Smart Growth potential opportunity zone.

The 2 percent that scored 10 or higher represent fewer than 700,000 people who currently live in zones that are walkable urban places with smart growth investment potential, according to the report.

By comparison, the country's designated zones are home to about 35 million Americans.

"History has repeatedly demonstrated that investment without protective equitable policy and process mechanisms lead to gentrification, displacement and a lack of access to benefits in many low-income and communities of color," the report stated. "Without any guidance from authorizing legislation or proposed Treasury regulations, investors, local policymakers and stakeholders are asking which opportunity zones have the greatest potential to create vibrant, inclusive" walkable communities.

Cities Ranked

Among the top 30 U.S. metropolitan areas, Smart Growth America said New York, Los Angeles, Philadelphia, and Chicago earned the top scores for zones with the most smart growth potential. Charlotte, San Antonio, Orlando, and Dallas received the lowest scores.

Some skepticism is also emerging in the commercial real estate industry whether the initiative will produce desired results. Skip Dolan, principal of Dolan Commercial Real Estate Services in northern New Jersey, delved into studying the real estate benefits of the initiative when word of the program first began circulating widely earlier this year.

"We became diligent students of the opportunity zones and have attended several high-level seminars to learn more, especially about what we do not know," Dolan said. "Additionally we made investments in technology to better gather information on properties in the OZ across multiple asset classes."

The bottom line: Dolan said his customers see it as an alternative to doing 1031 exchanges but are not that excited about jumping on the program's bandwagon. Under tax rules, a 1031 exchange allows an investor to sell a property to reinvest the proceeds in a new site and to defer capital gain taxes.

"We do not see compelling economic or deal making benefits for our customers to participate in the OZ outside of the treatment of reinvested proceeds," he said. "Which begs the question, if someone has a good income producing asset with a low cost basis whether a stock or real estate why would they sell and take the development risk?"

Opportunity zone tracts were picked based upon input from local mayors to the governor and as a result, there was no consistent application for a particular asset class or area, Dolan said.

"Remarkably we have seen wide swaths of unproductive, 'environmentally sensitive' wetlands and large cemeteries included in designated zones -- in a word: crazy," he said. "OZ designation will not increase rents, returns, lower interest rates on financing or improve a property's location. OZ might be the one that started out as a bang and ends as a whimper."

It is still in the early days of the initiative and it will take a while to see tangible results, HUD Secretary Carson said.

"Too often, new investments into distressed communities are here today and gone tomorrow," Carson said. "By offering incentives that encourage investors to think in terms of decades instead of days, opportunity zones ensure that development is here today and here to stay.

Apple To Build $1 Billion Campus in Austin; Add Thousands of Jobs in Other U.S. Cities

DECEMBER 13, 2018

By Mark Heschmeyer

New Sites Planned in Seattle, San Diego and Culver City, California

Apple's data center under construction in Reno, Nevada, is one of several the company is expanding over the next five years. Credit: Apple.

Apple Inc. announced Thursday a major expansion of its operations in Austin, including an investment of $1 billion to build a new campus in North Austin.

The company also said it would establish new sites in Seattle, San Diego and Culver City and expand in cities across the United States including Pittsburgh, New York and Boulder, Colorado over the next three years, with the potential for additional expansion elsewhere in the U.S. over time.

The announcement caps a year of continued job creation. Apple added 6,000 jobs to its American workforce in 2018 and now employs 90,000 people in all 50 states. The company has said it is on track to create 20,000 jobs in the U.S. by 2023.

"Talent, creativity and tomorrow's breakthrough ideas aren't limited by region or Zip code, and, with this new expansion, we're redoubling our commitment to cultivating the high-tech sector and workforce nationwide," Tim Cook, Apple's CEO, said in a statement.

Apple's newest Austin campus will be located less than a mile from its existing facilities . The 133-acre campus will initially accommodate 5,000 additional employees, with the capacity to grow to 15,000, and is projected to make Apple the largest private employer in the Texas state capital.

Jobs created at the new campus are to include a broad range of functions including engineering, research and development, operations, finance, sales and customer support. At 6,200 people, Austin already is home to the largest population of Apple employees outside Cupertino, California.

The new campus will include 50 acres of preserved open space and, like most Apple facilities worldwide, its workspaces are to be powered by 100 percent renewable energy.

Apple also plans to grow its employee base in other regions across the country over the next three years, expanding to more than 1,000 employees in Seattle, San Diego and Culver City each, and adding hundreds of new jobs in Pittsburgh, New York, Boulder, Boston and Portland, Oregon.

The company recently opened its newest office in Nashville, Tennessee and Apple's Miami office is projected to double in size.

Apple plans to invest $10 billion in US data centers over the next five years, including $4.5 billion this year and next. Apple's data centers in North Carolina, Arizona and Nevada are currently being expanded. In Iowa, preparations are underway for the company's newest data center in Waukee.

Cohen Media Group Buys Arthouse Landmark Theatres Chain

DECEMBER 10, 2018

By Kyle Hagerty

Before Work in Film Distribution and Production, New Owner Made a Fortune in Real Estate

The River Oaks Theatre in Houston. Via Flickr.

Arthouse cinema chain Landmark Theatres, once the source of speculation to be a target of multiple buyers including online retailer Amazon and streaming entertainment provider Netflix, has been sold to Cohen Media Group, a film distribution and production company whose billionaire chairman has amassed a national portfolio in commercial real estate.

Landmark is the nation's largest specialized theater chain dedicated to independent cinema with 252 screens in 27 markets across the country. Its openness to showing digital features produced by streaming platforms like Amazon and Netflix spawned interest from several groups.

Several of Landmark’s theaters are high-profile cinemas in their local markets, like the Landmark in Los Angeles and the Landmark at 57 West in New York, which is often used to host award-season events and screenings. Other theaters include the E Street Cinema and the Landmark Atlantic Plumbing Cinema in Washington, D.C., and the River Oaks Theatre in Houston. Cohen will retain the senior management team of all Landmark theaters.

Small cinemas are often being used to anchor developments or revitalize aged urban areas in older downtowns across the United States. From Minneapolis to Baltimore, Maryland, restored architecturally distinctive cinemas have attracted investors and developers to refurbish space for nearby restaurants, which in turn has led to added retail areas. New ownership of the arthouse theaters sends a signal to investors and owners across the country near Landmark properties that the anchor destination in those areas may not be changing for some time.

In the end, cinema fans may be satisfied with the new owner, which purchased Landmark from Mark Cuban and Todd Wagner’s 2929 Entertainment for an undisclosed price. Cohen Media is expected to maintain Landmark’s mission to promote independent and classic movies. The group also restores and re-releases films.

“I have been in the arthouse business for a long time as both a distributor and a producer, and I know better than most that these films need a special home and require the utmost care,” said Charles Cohen, the group’s chairman, in announcing the deal. “This is a phenomenal fit with our other businesses, and this deal will be welcome news to the filmmakers we do business with or plan to work with in the arthouse arena in the years ahead.”

Cohen founded his media group in 2008 after making a fortune as a real estate developer. As owner, president and chief executive of Cohen Brothers Realty Corp., he has built a portfolio of over 12 million square feet of prime properties located in New York, Texas, Florida and southern California. As a film producer, Cohen Media is known for “Frozen River,” which garnered two 2009 Academy Award nominations. The group distributed “The Salesman,” which won an Oscar for best foreign language film in 2017.

Landmark was purchased by 2929 Entertainment from Oaktree Capital in 2003. Under the ownership of Cuban and Wagner, Landmark has grown to become the pre-eminent flagship brand in sophisticated arthouse exhibition. Seven years ago, Landmark was put up for sale but later pulled back after failing to garner an estimated $200 million price tag.

“It’s a great day for the industry,” Landmark president and CEO Ted Mundorff told Variety. “You have a film lover who bought a theater company … and he’s going to keep the ship running the way it has been going.”

Google's $1 billion acquisition of the Britannia Shoreline Technology Park in its hometown of Mountain View, California, gives the search engine giant the record for the two most expensive U.S. office deals this year, coming on the heels of its $2.4 billion purchase of the Chelsea Market retail and office building in New York.

The company, part of Alphabet Inc., occupies about 92 percent of the Britannia Shoreline, a 795,000-square-foot, 11-building office campus at 2011-2091 Stierlin Court, a few blocks from Google’s headquarters known as the Googleplex. The campus, in the heart of Silicon Valley, is a past home to business networking website LinkedIn and currently houses offices of Alexza Pharmaceuticals.

Google purchased the property for about $1,275 a square foot from Irvine, California-based real estate investment trust HCP Inc., which expected to make a profit of $700 million upon closing, according to a filing with the Securities and Exchange Commission.

Google's spending on just two deals this year of about $3.4 billion, which its search engine shows is roughly the gross domestic product of the East African nation of Burundi, reflects the dominance of technology companies in U.S. real estate over the past decade. The tech industry accounts for about one-fifth of all office leasing completed across the country this year, according to brokerage CBRE Group Inc.

HCP, which is focused more on life science and medical offices and less on tech and traditional offices, said it plans to use the proceeds to repay debt and fund acquisition and development activity.

“At the time that we purchased it, there were more life-science tenants within the campus,” HCP Chief Financial Officer Peter Scott told investors on a conference call last month. “Over time, Google has taken over more and more of the space."

He added that "it became more of a non-core suburban office asset for us that was a great piece of real estate to own, but to get the pricing that we got and to be able to recycle that capital into more of the core markets that we’re in, made sense to us.”

The company acquired the property about 11 years ago as part of its $3 billion purchase of European property investor Slough Estates USA. Slough had purchased the Shoreline property for about $200 million in 2005 from Equity Office, according to news reports.

Google does not have plans to move any employees or redevelop the property, according to someone familiar with the property but unauthorized to speak publicly about it.

Chelsea Market Deal

The sale is the second-largest office deal in the country by dollar volume in 2018, behind Google's purchase earlier this year of New York City’s Chelsea Market for $2.4 billion as it plots its expansion in that city.

Chelsea Market, a former Nabisco factory, is home to a food hall and retail center on the ground floor with offices above. The 1.2 million-square-foot property sits across the street from the company's Manhattan beachhead at 111 Eighth Ave., a 2.9 million-square-foot office building that takes up a full city block.

Google has not revealed its plans for the property, which is occupied by companies including Major League Baseball, but the site is entitled for an additional 300,000 square feet, or about eight stories. The company reportedly has plans for a major expansion in New York City by adding about 12,000 workers for a total of roughly 20,000, according to news reports.

Google and other technology giants have been gobbling up real estate in their backyards in Silicon Valley and across the country. Google has made two major leasing moves in the past few months, signing a lease for 300,000 square feet in San Francisco’s Landmark at One Market building this month and moving into 319,000 square feet in a renovated historic airplane hangar once owned by Howard Hughes in Los Angeles in October.

Google has also been amassing properties in downtown San Jose, California, for the development of a massive mixed-use project near the city’s Diridon Station, a major transit hub.

Meanwhile, the world's biggest online retailer, Amazon, recently completed its year-long search for a major real estate expansion with plans to open major office hubs in the Queens borough of New York and in Arlington, Virginia.

Social media website provider Facebook has been busy expanding its headquarters in Menlo Park, California, which will total 1.4 million square feet upon the completion of the project’s third phase, and cloud-based software maker Salesforce recently said it has signed a lease for the entire office portion of a proposed tower at 542 Howard St. in downtown San Francisco.

Streaming entertainment service Netflix has expanded by more than 700,000 square feet in Los Angeles in the past few months. And Apple is on the hunt for another major campus somewhere in the country.

“With unemployment at 4 percent or lower in each of these markets, tech companies of all sizes are in a war for talent and must do their utmost to hold on to and recruit employees -- and that means the best salaries, the best incentives, the best space and the best location," said Robert Sammons, senior director of Northern California research for brokerage Cushman & Wakefield, in a statement. "That last point has generally meant an urban or even suburban location that is mixed-use, walkable, bikeable and near mass transit."

Apple Takes Opposite Approach to Amazon in Its Second Headquarters Search

NOVEMBER 20, 2018

Amazon hasn't been the only major technology company searching for a second headquarters this year, but few would know that from just reading the headlines. And that has been intentional.

Apple, the iPhone and device maker with a $1 trillion market value, is next in line for an HQ2 all its own. But the company is taking a vastly different approach than that of Amazon, the world's largest online retailer that played out its search for a second headquarters at full volume and in full view.

The quiet approach may end up helping Apple avoid the negative publicity and backlash Amazon faced, while the sheer size and power of the company still gives it plenty of leverage when searching for a campus under the radar.

“Ninety-nine percent of projects are done in a confidential manner because companies want executives and senior management not to be preoccupied with a search in the news,” said John Boyd, founder and principal at The Boyd Co., a Princeton, New Jersey-based site selection consulting company. “Amazon is a very unique company. Few companies have the swagger and wherewithal to pull off a head office site selection search in the in-your-face way they have.”

Apple’s search has been almost secret. The company kicked off a quiet hunt in January for a significant real estate presence outside of California -- where all 2.8 million square feet of its ring-shaped headquarters sits in Silicon Valley's Cupertino -- by announcing a general contribution to the larger U.S. economy of $350 billion in the five years, creating some 20,000 jobs in the process.

"The company plans to establish an Apple campus in a new location, which will initially house technical support for customers," the company said in January. "The location of this new facility will be announced later in the year."

Apple officials have said very little about the process publicly since then, and it's unclear whether the company still intends to make any announcements before year's end. Apple did not return a request for comment.

In contrast, Amazon promised $5 billion and 50,000 jobs for its second headquarters alone and publicly requested proposals from cities across North America that became a frenzied competition of incentives, gifts and YouTube videos from 238 cities. The Seattle retailer's search ended very publicly last week in a split headquarters decision among New York City and Arlington, Virginia, as sites for major new hubs and Nashville, Tennessee, for an operations center.

Avoiding Distractions

While Amazon's search made headlines almost weekly, the quiet search has kept Apple's name largely out of the real estate press this year.

“It’s the much more traditional way to do it quietly,” said Bert Sperling, an Oregon-based author and analyst who specializes in cities and site selection.

By going about the process quietly, Apple can keep prying eyes off its potential deals and negotiations, avoid distractions and go at its own pace, Sperling said.

The company also may avoid high-profile backlash from the cities it passes over. Amazon has fielded a number of criticisms from officials and companies who say they have felt heartbroken, fooled or slighted by the entire public process.

In fact, Apple Chief Executive Tim Cook said his company has been specifically avoiding any kind of competitive bids for its second campus.

"We’ve narrowed the list [of potential cities] a lot,” Cook told ABC News in January. “We wanted to narrow it so we prevent this kind of auction process that we want to stay out of.”

For Apple, North Carolina’s Research Triangle, which includes Raleigh , Durham and Chapel Hill, emerged as a favorite for a new campus, according to news reports. But reports since August have suggested that some in the region were resistant to Apple’s new campus.

Raleigh courted Amazon, which added the city to a short list of 20 finalists for its HQ2.

As a result of the search and its final decision, Amazon is now spreading out tens of thousands of jobs among the three chosen cities -- and collecting close to $3 billion in incentives from state and local governments.

Incentives Offer

While Apple has not publicly solicited incentives for its real estate project, Wake County, North Carolina, offered Amazon its largest incentive package of up to $277 million if it had agreed to move its HQ2 to Raleigh, according to a letter from the county manager in February.

It's unclear whether Apple is negotiating for incentives for its second campus. But companies like Apple and Amazon are likely to get incentives from city and state governments no matter what tactic they employ to select a site, Sperling said.

"They will get incentives because what politician wants to say 'No, I’m the one who said no to Apple and all these jobs' because they played hardball,” Sperling said.

And even though incentives are an important part of the site-selection equation, there’s something that’s more important, and it’s real estate’s oldest adage: location, location, location.

“All of these places that dangle large incentives are kind of making a mistake,” Sperling said. “If a place is really excellent, and is the winner as far as a place to locate, that means more to the company than any sort of incentives.”

In the case of Amazon, which has a cloud computing division that has started competing for federal contracts, locating in the Washington, D.C. area made perfect sense, Sperling said, without the $573 million in direct incentives Amazon received from the City of Arlington and a workforce cash grant worth up to $550 million from the Commonwealth of Virginia.

Take, for example, Google. The search engine giant is reportedly making plans to massively expand in New York, without any individualized incentive. The company could grow by as many as 12,000 additional workers to a total of about 20,000 in the city, only about 5,000 fewer jobs than Amazon has promised New York in its new headquarters hub.

Sperling compared the quest for a new campus to searching for a place to live.

“If you can find a good place to live and can afford it, are you going to live in a place that is subpar because you got a really good deal? If you can afford it, you’ll get a nicer place," he said. "Apple can afford anything.”

For Apartment Owners in Arlington, Virginia, and Queens, New York, Amazon HQ2 Means Decision Time

NOVEMBER 16, 2018

By John Doherty

Do They Sell or Do They Hold?

Interest in the 140-unit Key Towers in Arlington has exploded since the Amazon HQ2 announcement.

Most owners, developers and brokers say they don’t expect a flood of new big, apartment offerings to hit the market in the wake of the Amazon announcement. Most will hang on and see if rents and values actually increase as Amazon moves into their markets.

Even so, some report the interest, at least, from potential buyers is already high.

Al Cissel, an apartment broker for Newmark Knight Frank in the company's office in McLean, Virginia, started shopping Key Towers in Arlington a few weeks ago. The 140-unit complex is a prime target for investors that like to fix up units to let them boost rents and improve the management to maximize profits. It's a fixer-upper built in 1964, so he expected the usual 80 to 100 interested investors would sign confidentiality agreements to see the property’s finances, the first step before making a bid. He originally expected pricing to be about $30 million.

Instead, as word leaked that Amazon would probably end up in Northern Virginia, interest exploded. So far, almost twice as many investors -- 160 -- have signed confidentiality agreements, he said. Pricing for Key Towers could be a litmus test for the market with Amazon in the calculations.

“We’re seeing a pretty immediate escalation in interest,” said Cissel, an executive managing director. “But it’s hard to say what will happen. Some owners are deciding to sell now. But there’s mixed feelings.”

Amazon’s announcement presented Geoff Glazer with just that dilemma.

His firm, Kimco Realty, is close to finishing The Witmer , a 26-story, 440-apartment tower in Arlington’s Crystal City, right across South Fern Street from where Amazon is headed. The swank apartments and the amenities -- there’s a rooftop pool and a spa for dogs -- are part of Kimco’s larger Pentagon Centre mixed-use project. The apartments are designed to appeal to exactly the type of young, well-paid urban professionals Amazon is expected to hire in the thousands.

Should the New York firm look to cash out now? Or should it plow the money into future phases of their Pentagon Centre development? Will buyers pay a premium to be close to Amazon?

“No, I think our desire is to hold on to that property a good long time,” said Glazer, Kimco’s senior vice president of development. “I look at the players now who own major properties in the area, and I don’t think a lot of them are looking to sell. I think people are going to watch what happens and count on some decent [rent] bumps.”

In Queens, Amazon’s announcement came in the midst of a complete makeover for the Long Island City neighborhood the company selected for half of its second headquarters, or HQ2, split with Arlington. The former warehouse district across the East River from Manhattan is being redeveloped on a major scale.

Six new high-rise apartment properties are expected to be finished by year-end. Before 2017, Long Island City had only 10 total, according to CoStar data. One, a pair of towers with nearly 1,200 units known as 5Pointz, is nearing completion this month.

Chase, of B6, says 17,000 new units were completed there since 2010, and another 11,000 are under construction. For the owners of those projects -- mostly local shops backed by outside money -- there will be pressure to sell.

“Those owners’ phones are ringing off the hook,” said James Nelson, a principal at brokerage Avison Young in New York. “How many investors who were not looking at Queens, or Long Island City, are now?”

The Amazon agreement with the city immediately changed the apartment market in Long Island City, too. As part of the agreement, Amazon will take over the bulk of a 15-acre site, called Anabel Basin, for its headquarters. The owner of the site, family-run plastics company and long-time Long Island City real estate investor Plaxall, had last year submitted a mixed-use redevelopment plan that would have brought 5,000 new apartments to Long Island City. Now it will be Amazon office space.

In both markets, the ripple effect may be where the investment action goes. Neighboring parts of Queens and Brooklyn may see more listings for apartments -– not for the Amazon employees who will average $150,000 salaries, according to the company, but for residents priced out of their current apartments as the Amazon effect drives rents up.

And not all Amazon employees will want to live in Crystal City, acknowledges Glazer. Properties in surrounding Northern Virginia towns and even across the river in Washington, D.C., may end up with falling vacancy rates and rising rents –- a trend investors are likely to follow.

NOVEMBER 14, 2018

Coworking Provider Would Rank Among Most Valuable Startups Behind Uber

The rapid expansion of WeWork is expected to continue with another $3 billion cash infusion from Softbank next year.

WeWork’s widening loss could be offset with a $3 billion investment from Softbank Group, according to reports.

At a presentation to bond investors, WeWork disclosed that the Japanese conglomerate, already a big investor of the flexible-office space provider, would inject the funds in the form of warrants early next year, according to a number of published reports. The presentation is not public.

The warrants give Softbank an opportunity to convert its investment into WeWork shares by the end of September 2019, jacking the valuation on the 8-year-old company to $42 billion to $45 billion, according to news outlets that have viewed the presentation.

By Dow Jones VentureSource’s calculations, that vaults the New York-based firm’s valuation to No. 2 in the startup category, behind only ride-sharing firm Uber Technologies and ahead of online lodging marketplace Airbnb.

The funding comes from Softbank’s corporate balance sheet, not the Vision Fund that has already injected $4.4 billion into WeWork, reports noted. The earlier financial support from the Vision Fund became controversial when it was noted that some $45 billion of that fund’s financing source is from Saudi Arabian investors.

The death of journalist Jamal Khashoggi has prompted calls on companies to rebuff Saudi investments. Saudi Arabia has said its agents strangled Khashoggi in October during a fight inside the Saudi Consulate in Istanbul, according to news reports. During the presentation, Artie Minson, WeWork’s president and chief financial officer, said such requests were “irrelevant” because the funds are coming from the corporation.

SoftBank is expected to fork over $1.5 billion on Jan. 15 with another $1.5 billion coming on April 15, according to the reports. If the company is sold or goes public on or before Sept. 30, those warrants are converted into stock valued at $110 a share. That is what supports the high valuation, which last year stood at about $20 billion, according to the reports.

Minson called the funding “opportunistic” at a time when WeWork is plowing billions into its breakneck growth, which is touching more than just the office sector as the company tests brokerage, information technology, architectural, meeting space, retail and even child-care services.

“The way we work with SoftBank emphasizes speed and getting it done quickly … that speaks to overall momentum in the business,” Minson was quoted in the reports as saying at the presentation.

That velocity also comes with hefty losses, which now carry a roughly $2 billion annual run rate, according to the reports. WeWork said its third-quarter losses expanded to $415 million from $108 million in the year-earlier period. Its first-half losses totaled $723 million, reports said.

WeWork and SoftBank did not respond to requests for comment from CoStar News.

Revenue nearly doubled to $1.2 billion from $603 million at this time last year. At the same time, spending zipped ahead nearly threefold to $244 million in the first nine months from $84 million a year ago. WeWork attributed that to higher outlays for upfront costs to build out space and sign longer tenant leases. WeWork also has been aggressive in courting tenants, even for entire buildings, at discounts.

The company has no intention of putting the brakes on growth, according to Minson, or of turning the losses into positive earnings before interest, tax, depreciation and amortization, a key financial metric known as EBITDA, a move he said would be irresponsible, according to reports.

In the coming months, WeWork plans to add two new Manhattan properties to its HQ by WeWork portfolio, which targets tenants with up to 250 employees. With those two deals in place, the company has breached 700,000 square feet in HQ by WeWork locations nationally. This year, it announced a target of 1 million square feet within major markets by next summer.

“We could massively slow down the growth and turn EBITDA-positive, but that would be shortsighted,” Minson was quoted as saying during the presentation.

What's An HQ Worth? New York, Virginia and Tennessee Pledge More than $2 Billion to Amazon

NOVEMBER 14, 2018

By Lou Hirsch

Online Giant Eligible For Tax Rebates, Credits, Even Help With Helipads.

Arlington, Virginia, across the river from Washington, D.C., will be home to another Amazon headquarters

In return for locating major office hubs in New York's Long Island City and in Arlington, Virginia, online retailer Amazon will receive hundreds of millions of dollars in direct grants, and get the benefits of new public investments in infrastructure and university programs. It will even get help securing the right to use helipads in restricted airspace and have government officials notify the company two business days before disclosing public information.

The incentives awarded to the world's largest retailer, disclosed as part of its site selection announcement Tuesday, raise questions whether the cities -- along with Nashville, Tennessee, where the company said it plans to open an operations hub -- ever needed to pay so much. Virginia and New York alone pledged more than $2 billion, but other states offered far more.

Amazon said it plans to invest more than $5 billion in capital spending and create at least 55,000 new jobs with an annual salary of at least $150,000 among the three cities when it said it would split its long-anticipated second headquarters into two major office hubs and an operations center. The company expects the two new office hub sites to eventually equal the 8.1 million square feet in 33 buildings at Amazon's Seattle headquarters, generating heightened real estate demand in both markets.

But the incentives that range from tax credit and rebates to customized transportation projects have been one of the most talked about pieces of the announcement, following months of offers from 20 finalist cities nationwide and in Canada that reached as high as $8.5 billion.

Some analysts consider the incentives a worthy cause to win a nationwide competition that may have been the largest single economic development opportunity in a lifetime, drawing proposals from 238 cities. Others wonder why the world’s largest online retailer and one of the most valuable publicly traded companies needed a public financing boost.

John Boyd, principal in the location consulting firm Boyd Co. Inc. in Princeton, New Jersey, said incentives have always been considered a "necessary evil" in the world of economic development. But he contends the incentives Amazon has been offered were justified and will ultimately pay off for the chosen cities.

"In terms of incentives though, in suburban D.C and New York City, both sides agreed that was the cost of doing business," Boyd said, because both cities are also among the nation's most expensive for companies in general to cover worker and other costs.

Even among the states that won, the totals varied widely. Virginia and the city of Arlington agreed to a total of $575 million in direct incentives to Amazon; the state and city of New York agreed to $1.525 billion in direct incentives; and $102 million in direct incentives from Nashville, according to Amazon's announcement. There are further incentives in all three cities over the next several years, from state and city programs, tied to job creation and Amazon's application to various programs geared to employment, relocation, and growth in overall tax revenue.

Among the most unusual of the incentives provided to Amazon, New York and Virginia both offered assistance to the company that plans to add dedicated helipads to Amazon’s proposed spaces in each region. Each locale exists in restricted airspace that would require seeking approval from the Federal Aviation Administration. In its New York agreement, the city is expected to help Amazon find another location for a helipad nearby if it can’t get approval at its building.

Amazon is also seeking control over the public’s right to information. In its memo of understanding with Virginia, officials agreed to give Amazon “prior written notice sufficient (in no event less than 2 business days) to allow the company to seek a protective order or other appropriate remedy” in response to any request for public records related to the company.

Greg LeRoy, director of Good Jobs First, a Washington, D.C.-based organization that tracks corporate subsidies, said he was surprised by the fact that Amazon, which in the past has kept details about its incentives hidden, provided the amounts of incentives offered by state and local governments in materials released to the media as part of Tuesday’s announcement.

LeRoy raised questions about whether all the incentives were being disclosed, explaining that in deals such as this, there are usually two types of incentives involved. The first kind are “discretionary” incentives, which are formulated and directed to specific projects. These kinds of incentives are usually fully disclosed to the public and given in full view.

Other incentives, though, are called “as-of-right” incentives and include certain tax breaks and other provisions to which companies are legally entitled, LeRoy said. A project the size of Amazon’s should qualify for such incentives, he said. These are the incentives LeRoy is concerned migth be missing from the materials Amazon released.

"What else belongs in that denominator beyond what they've said?" he asked.

While the company is expected to rake in a number of benefits, Amazon said incentives weren’t the driving factor in its decision, talent was.

"Some of the proposals that were put forward, you can find out very quickly that incentives did not drive this process for us,” Jay Carney, Amazon’s senior vice president of worldwide corporate affairs, told cable financial news channel CNBC. “The incentives that we’re getting are performance based…we don’t get the job, we don’t get the incentives… Also if you look at the Memo of Understanding and the revenue projects that will accrue to the cities and states of each location, [it's] billions of dollar that will far outweigh the incentive packages.”

The company has also said that, in addition to jobs and capital spending, it plans to provide community benefits such as donating land for a school or holding hiring fairs in lower-income areas.

Amazon did not immediately respond to requests for comment.

Richard Green, chairman of the University of Southern California's Lusk Center for Real Estate and its Department of Policy and Analysis and Real Estate, said he sees the incentives from two cities with some of the world's most robust economies as taking money from low-income city residents and handing it over to Amazon shareholders.

"I don't understand how cities let themselves be looted like this," Green said. For Amazon to receive financial incentives, it "means that all the other businesses that are there are going to bear the burden of providing those subsidies to Amazon. And if I'm a competitor to Amazon in any capacity, I’m pretty upset about it."

Gerald Gordon, president and chief executive of the Fairfax County Economic Development Authority in Virginia, contends that local incentives -- a total of $20 million in property-related tax breaks offered by Fairfax and neighboring Loudon counties, on top of "several hundred million more" by the state -- are quite justified, noting 25,000 jobs are likely to translate to at least 50,000 more, based on traditionally recognized multiplier effects.

The incentive package Arlington offered Amazon is in line with other recent packages in the area.

In February 2017, the City of Arlington and the Commonwealth of Virginia offered Nestlé USA, the maker of Häagen-Dazs, Baby Ruth and Lean Cuisine, a total of about $16 million in incentives to move its U.S. headquarters to Arlington’s Rosslyn area, bringing roughly 750 jobs. That works out to about $21,333 per job.

Local communities near Crystal City are expecting spillover effects from Amazon in the form of heightened demand for offices and other commercial real estate, generating additional property taxes that will ultimately outpace the incentives granted to Amazon, Gordon said.

The shot in the arm for Northern Virginia, he said, is on par with the results of what happened in the mid-1980s, when Mobil Oil, years before its eventual merger with Exxon, moved its headquarters from New York City to Fairfax, Virginia. That relocation spurred other large companies to consider Northern Virginia.

While some incentives may have played a role, Gordon said access to a trained workforce was the key factor that helped Northern Virginia beat out suburban Connecticut, Dallas and Denver for the Mobil headquarters, and the same factor probably aided the landing of Amazon.

Real estate economist Alan Nevin, director of economic and market research for consulting firm Xpera Group in San Diego, largely agrees with the idea that the workforce was a critical factor.

"It's not as if they'll need to import new workers," Nevin said of Amazon. "They're more likely to poach them from other companies."

The Northern Virginia and New York City markets spread well beyond the exact planned property locations for Amazon's new operations, and both have a wide existing supply of high-end housing that will be acquired by new workers who will be making up to $150,000 annually in their new Amazon jobs.

In all, Nevin said he thinks cities and the companies mutually benefit from the incentive agreements.

"It's a fair trade, plus the cities get the prestige of being selected," he said. "Also, you get these highly paid professionals who will be buying expensive homes, expensive cars and all sorts of other things."

Incentives by Location:

Long Island City, New YorkAmazon is set to receive performance-based direct incentives of $1.525 billion based on the company creating 25,000 jobs in Long Island City. This includes a refundable tax credit through New York State’s Excelsior Program of up to $1.2 billion calculated as a percentage of the salaries Amazon expects to pay employees over the next 10 years, which equates to $48,000 per job for 25,000 jobs with an average wage of over $150,000; and a cash grant from Empire State Development of $325 million based on the square footage of buildings occupied in the next 10 years.

Amazon is expected to receive these incentives over the next decade based on the incremental jobs it creates each year and as it reaches building occupancy targets. The company plans to separately apply for as-of-right incentives including New York City’s Industrial & Commercial Abatement Program (ICAP) and New York City’s Relocation and Employment Assistance Program (REAP).

New York City plans to provide funding through a Payment In Lieu Of Tax (PILOT) program based on Amazon’s property taxes on a portion of the development site to fund community infrastructure improvements developed through input from residents during the planning process. Amazon has agreed to donate space on its campus for a tech startup incubator and for use by artists and industrial businesses, and Amazon expects to donate a site for a new primary or intermediary public school. The company plans to also invest in infrastructure improvements and new green spaces.

Crystal City, Virginia

In Crystal City, Amazon is set to receive performance-based direct incentives of $573 million based on the company creating 25,000 jobs with an average wage of over $150,000. This includes a workforce cash grant from the Commonwealth of Virginia of up to $550 million based on $22,000 for each job created over the next 12 years, if it creates the expected high-paying jobs. The company is set to also receive a cash grant from Arlington of $23 million over 15 years based on the incremental growth of the existing local transient occupancy tax, a tax on hotel rooms.

The Commonwealth of Virginia agreed to invest $195 million in infrastructure in the neighborhood, including improvements to the Crystal City and the Potomac Yards Metro stations; a pedestrian bridge connecting National Landing and Reagan National Airport; and work to improve safety, accessibility, and the pedestrian experience crossing Route 1 over the next 10 years.

Arlington plans to also dedicate an estimated $28 million based on 12 percent of future property tax revenues earned from an existing tax increment financing (TIF) district for on-site infrastructure and open space in National Landing.

In a related move, Virginia Tech said it would build a $1 billion "innovation" campus for graduate students near Amazon’s new headquarters in Northern Virginia; that state has committed $250 million in funding. Northern Virginia's George Mason University said it too would create an institute to focus on digital innovation, and establish a new school of computing.

Nashville, Tennessee

Amazon is set to receive performance-based direct incentives of up to $102 million based on the company creating 5,000 jobs with an average wage of over $150,000 in Nashville. This includes a cash grant for capital expenditures from the state of Tennessee of $65 million based on the company creating 5,000 jobs over the next seven years, which is equivalent to $13,000 per job; a cash grant from the city of Nashville of up to $15 million based on $500 for each job created over the next seven years; and a job tax credit to offset franchise and excise taxes from the state of Tennessee of $21.7 million based on $4,500 per new job over the next seven years.

Amazon Chooses New York City, Virginia for New HQ Sites as Nashville Gets Operations Center

NOVEMBER 13, 2018

By Lou Hirsch

Online Retailer's Decision Ends Year-Long Search

Queens, New York will be the site of an Amazon headquarters.

Amazon selected New York City and Arlington, Virginia, as sites for the online retailer’s second and apparently third headquarters, ending a year-long search for a project the company says will produce 50,000 jobs and more than $5 billion in capital spending. In a twist, the company said it is also putting an operations center in Nashville, Tennessee.

The Seattle-based company, the world’s biggest online retailer, said it chose the Long Island City neighborhood in New York and the Crystal City section of Arlington, across the river from Washington, D.C., to gain access to a skilled workforce.

“These two locations will allow us to attract world-class talent that will help us to continue inventing for customers for years to come," Jeff Bezos, founder and CEO of Amazon, said in a statement.

The decision forces officials in the 17 finalist cities that were passed over for a major facility to decide how they can use development plans they created to woo Amazon to lure other businesses. The effect on all 20 major markets in one fell swoop makes the decision one of the most significant events in recent U.S. commercial real estate history. Amazon, which occupies almost 8 million square feet in 33 buildings in Seattle, said last year the size and scope of the area it selects would be a full equal of its Seattle footprint in 10 to 15 years.

The announcement follows more than a week of news stories saying that Amazon was in discussions with officials in the two cities about splitting what was initially supposed to be only one site the company has been calling HQ2.

The decision to split the headquarters between Crystal City and Long Island City suggests that each area may get about half the expected employees and capital spending but Amazon has not outlined publicly how it plans to divvy up the operations.

The selection of Crystal City is within roughly six miles of founder and Chief Executive Jeffrey P. Bezos’ $23 million mansion in Washington, D.C., which he purchased in the Kalorama section of D.C. in October 2017. It’s also in the same area as The Washington Post Co., which Bezos purchased for $250 million in 2013. That region was the only area with three of the 20 finalists.

Previous reports said Amazon was in late-stage talks to locate HQ2 in the Crystal City neighborhood of Arlington, in the area next to Ronald Reagan National Airport across the Potomac River from Washington, D.C.

Amazon said its operations center in Nashville will have 5,000 full-time, high-paying jobs; $230 million in investments; 1 million square feet of office space; and an estimated incremental tax revenue of more than $1 billion over the next 10 years.

The retailer said it will receive performance-based direct incentives of up to $102 million based on the company creating 5,000 jobs with an average wage of more than $150,000 in Nashville. This includes a cash grant for capital expenditures from the state of Tennessee of $65 million based on the company creating 5,000 jobs over the next seven years, which is equivalent to $13,000 per job; a cash grant from the city of Nashville of up to $15 million based on $500 for each job created over the next seven years; and a job tax credit to offset franchise and excise taxes from the state of Tennessee of $21.7 million based on $4,500 per new job over the next seven years.

Crystal City Space

Crystal City makes sense for Amazon’s HQ2 because it has office space that's immediately available, several new residential developments and is adjacent to the airport, said Nicholas Mills, a CoStar analyst. “Amazon wants to take space right away and slowly build out a campus,” Mills said. “With Crystal City, they only have to negotiate with one landlord, JBG Smith,” referring to a development company that owns significant amounts of property in the area.

Plus, Crystal City earned some cache recently when coworking giant WeWork converted a 1964 office building -- owned by JBG Smith -- to one of its first coliving properties under the name WeLive. The business model involves renting furnished living space with shared gathering areas.

It's key that Crystal City is served by the Crystal City and Pentagon City Metro stations, Mills said. Amazon has placed high priority on accessibility and public transportation availability in its HQ2 search. JBG Smith points out in several places on its website that 98 percent of its properties are near a Metro stop.

Amazon said Virginia and Arlington will get more than 25,000 full-time high-paying jobs; about $2.5 billion in Amazon investment; 4 million square feet of energy-efficient office space with the opportunity to expand to 8 million square feet; and an estimated incremental tax revenue of $3.2 billion over the next 20 years as a result of Amazon’s investment and job creation.

The retailer said it will receive performance-based direct incentives of $573 million based on the company creating 25,000 jobs with an average wage of over $150,000 in Arlington. This includes a workforce cash grant from the Commonwealth of Virginia of up to $550 million based on $22,000 for each job created over the next 12 years. Amazon will only receive this incentive if it creates the high-paying jobs. The company will also receive a cash grant from Arlington of $23 million over 15 years based on the incremental growth of the existing local Transient Occupancy Tax, a tax on hotel rooms.

Virginia plans to invest $195 million in infrastructure in the neighborhood, including improvements to the Crystal City and the Potomac Yards Metro stations; a pedestrian bridge connecting National Landing and Reagan National Airport; and work to improve safety, accessibility, and the pedestrian experience crossing Route 1 over the next 10 years, Amazon said. Arlington will also use about $28 million based on 12 percent of future property tax revenue from an existing Tax Increment Financing district for on-site infrastructure and open space in the area, which Amazon is now calling "National Landing."

Northern Virginia, a region that long has been considered one of a handful of favorites to win HQ2, already is home to a corporate campus of Amazon Web Services, known as AWS. This division, which houses its biggest data centers in the area, provides on-demand cloud services for large enterprises.

Amazon Web Services is in the running to win a $10 billion contract from the U.S. Department of Defense to provide services to its Joint Enterprise Defense Initiative, or JEDI program. Crystal City is about a mile from the entrance to the Pentagon, home of the Defense Department.

Amazon is expected to move employees into two aging office buildings -- Crystal Square 3 at 1770 Crystal Drive and Crystal Mall Office 3 at 1851 S. Bell St. -- that used to house government agencies, the Post said. JBG Smith owns both buildings and currently is renovating Crystal Square 3, a 13-story, 242,100-square-foot building, according to CoStar data.

Crystal City, located on the Potomac River just across the George Washington Memorial Parkway from Reagan National, initially was an industrial area housing brickyards, warehouses, junk yards and several motels as well as a drive-in theater, according to a history of the area on the city of Arlington’s website.

Amazon could turn the neighborhood into a sought-after place to live and work, CoStar's Mills said. "It's going to create a lot of buzz," he said. "People will want to move there so they can say they live where Amazon is."

Long Island City's Office Vacancies

Long Island City, part of New York City's Queens borough, is enticing because it is close to air and highway transportation, has millions of square feet of available land, and more than 15 percent of its office space is now empty, say brokers, developers and analysts. It's also about four miles from Bezos' luxury condos at 25 Central Park West in Manhattan.

Amazon said New York and its Long Island City neighborhood will benefit from more than 25,000 full-time jobs; about $2.5 billion in Amazon investment; 4 million square feet of office space with an opportunity to expand to 8 million square feet; and an estimated incremental tax revenue of more than $10 billion over the next 20 years as a result of Amazon’s investment and job creation.

The company said it will receive performance-based direct incentives of $1.525 billion based on Amazon creating 25,000 jobs in Long Island City. This includes a refundable tax credit through New York State’s Excelsior Program of up to $1.2 billion calculated as a percentage of the salaries Amazon expects to pay employees over the next 10 years, which equates to $48,000 per job for 25,000 jobs with an average wage of over $150,000; and a cash grant from Empire State Development of $325 million based on the square footage of buildings occupied in the next 10 years.

The neighborhood offers various options for Amazon's expansion, whether it builds, buys or rents, brokers and developers said. Of four neighborhood sites submitted to Amazon, they explained, Long Island City edges out the other three proposed New York sites -- Midtown West, Manhattan's financial district and downtown Brooklyn -- because it's closer to New York airports and major transportation thoroughfares and has less commercial property density.

Among drawbacks cited before the selection of Long Island City, analysts had said New York could have trouble competing with other cities that have lower costs of living and a lower-paid, non-union construction labor force.

CoStar Market Analytics shows why Long Island City may have edged out the other three sites in New York City, with that neighborhood having about 660 million square feet of available development land. That would be plenty of room for the online retailer, which had initially sought space for one 500,000-square-foot corporate campus with as much as 8 million square feet of expansion potential. Now, Amazon appears to be splitting that requirement among two cities.

Long Island City has a healthy amount of availability compared to the broader New York City area. Office inventory within the area totals 16.3 million square feet, with a vacancy rate of 16.3 percent, according to CoStar data. The New York Metro area has a 8.7 percent vacancy rate.

Adding to its options are 14 additional properties under construction that are larger than 250,000 square feet, according to CoStar data. Currently, two buildings have more than 250,000 square feet available, while another under construction will have more than 250,000 square feet available.

Amazon has said after the selection was announced it would soon begin hiring for a number of positions, primarily executive and management roles, software development engineers, and legal, accounting and administrative personnel. The average salary will exceed $100,000 per year, according to the company.

Amazon hasn’t said publicly how many employees will be dispatched to HQ2, and HQ3, immediately. But an undetermined number of senior executives and mid-level managers -- perhaps hundreds -- will probably come from the current headquarters in Seattle, at least for a while to aid in the transition and transferring its corporate culture. Amazon has said it expects the bulk of employees will be hired locally.

The national competition for Amazon’s second headquarters began in September 2017, generating intense scrutiny and prompting 238 cities across the U.S. to court the company. Maryland Gov. Larry Hogan in February called Amazon HQ2 “the greatest economic development opportunity in a generation.”

The competition galvanized efforts around economic development in each of the cities, sending officials scrambling to rezone potential sites and create incentives packages to attract Amazon’s attention. At $8.5 billion in Maryland and $7 billion in the state of New Jersey, those two states are among the cities that offered the most. The company announced its short list of finalists in January.

For those snubbed cities, “it’s kind of like being a silver or bronze medalist in the Olympics,” said Jim Beatty, president of NCS International, which provides site selection and real estate services to corporations, but has not worked with Amazon. “They didn’t win, but they got a lot of exposure. Any corporation of any size looking at expansion is probably taking some type of look at these cities.”

In its request for proposals for its so-called HQ2, Amazon stressed access to public transportation -- existing infrastructure and proposed improvements -- as part of its wish list. Bike lanes, bus routes, light rail, subways, walkability and uncongested roads could sweeten proposals, company officials said. Amazon representatives surprised some local officials during their onsite visits by quizzing them more about regional transportation and housing issues than financial incentives, according to several reports.

That push to improve public transit could help the locations that aren't picked focus on improving their transportation infrastructure the next time a big corporation looks for a new home, Beatty said.

The opportunity in New York and Virginia is huge, but there are pitfalls. In Seattle, Amazon drove unprecedented job growth, completely revitalized neighborhoods around its campus, sparked an urban residential development boom and created a talent pool that helped convince companies such as Facebook, Google, Go Daddy and Twitter to open satellite offices there.

However, its rapid growth also strained the housing market, contributed to already festering traffic congestion and placed pressure on an underbuilt public transportation system.

NOVEMBER 08, 2018

By Tony Wilbert

Arlington, Virginia, New York Would Benefit Modestly

The supply of office buildings in Crystal City makes it a potential site for Amazon HQ2.

If Amazon splits its second headquarters project between two cities, the winners would get only "muted upside" to their economies and credit ratings, especially if the online retail giant selects locations in New York City and near Washington, D.C., according to Fitch Ratings.

Landing half of an additional Amazon headquarters also would not greatly affect either area's housing market, Fitch said in a report.

The addition of 25,000 new jobs each to the two well-established major metropolitan areas "would have at most a muted impact on the economies and credit quality of Arlington County and New York City," said Fitch, a company that rates the credit and ability to repay debt of municipalities. Arlington County has a AAA/Stable bond rating and New York City holds a AA/Stable rating from Fitch, signifying that both municipalities are creditworthy and can meet their financial obligations.

The potential selection of two cities with strong economies even further reduces the expected impact of landing Amazon's second headquarters, known as HQ2. "Given the large size of the locations remaining in contention, any impact would be modest, particularly if HQ2 is split," Fitch said. "The direct impact on local government revenues from Amazon will be reduced not only by splitting HQ2 but also by anticipated state and local incentives."

When Amazon issued the request for proposals (RFP) for a second headquarters in September 2017, the company said it would "be a full equal to our current campus in Seattle." The company also said it would hire as many as 50,000 new full-time employees over the following decade to 15 years and invest more than $5 billion in capital expenditures over 15 to 17 years to build out its second campus.

The request for proposals created unprecedented economic development excitement among cities and counties, 238 of which submitted proposals. In January, Amazon released its somewhat short list of 20 candidate locations to win HQ2 and visited those cities and counties, even returning to some this summer.

The Washington Post, owned by Amazon founder and Chief Executive Jeff Bezos, reported on Saturday the company was in advanced talks to locate its second headquarters in the Crystal City area of Arlington, Virginia, and the Wall Street Journal reported Amazon plans to split the project between two cities, with Crystal City, Long Island City in New York and Dallas in the running to get half the second headquarters.

The overall impact of 25,000 new jobs in the Washington and New York metro areas would be modest because that number represents a small percentage of their existing workforces, Fitch said. Even if Washington wins the entire second headquarters and all 50,000 new jobs, it would represent "a modest 1.5 percent of the labor force in the metro area. In the New York area, 50,000 jobs only represents 0.5 percent of its labor force, according to a Fitch analysis.

"New York City and Arlington in the D.C. metro area already have very vast resources" and residents with high income levels, said Amy Laskey, managing director of Fitch Ratings' U.S. Public Finance Group. "It would be an addition of more of the same."

As for the metropolitan area's housing market, the new jobs would not greatly impact either one, according to the Fitch report. "We do not expect much change in home prices in either location as healthy economic dynamics are already pushing up prices and supply should be sufficient to absorb the needs," the Fitch report said. "The Washington, D.C., area is more likely to benefit than New York City as it has slower growth in rents and home prices."

Although the immediate impact of winning half of Amazon's second headquarters would be muted, it still would benefit the economy of the winning cities and their surrounding areas because they "will see some indirect benefit from increased tax revenues generated by employees and related businesses," Fitch said.

"The one wrinkle in that is the level of incentives the governments give," Laskey said. If a winning city offered a large incentives package, the payoff might not be realized for years.

Though Amazon has given no definitive date for announcing the city or cities that will win HQ2, Bezos has said the decision will be made by the end of the year. In its report, Fitch said the announcement "may come as early as later this week."

Lowe's Joins Ranks of Big-Box Retailers That Are Closing Stores

NOVEMBER 05, 2018

Home Improvement Giant Says 47 Stores and 4 Other Facilities to Go Dark by February

The home improvement chain joins the growing ranks of dark big-box stores in the U.S. and Canada.

Lowe’s Companies said it will close 51 locations in North America, the latest big-box retailer to try to better balance its brick-and-mortar and e-commerce resources as more consumers shop online.

Facing pressure from shareholder activists and increased competition, the home-improvement giant is closing 20 underperforming stores in the United States and 27 in Canada, as well as four offices and specialty plants. Of the Canadian sites, 24 were part of the $2.3 billion acquisition of Quebec-based Rona in 2016.

“The store closures are a necessary step in our strategic reassessment as we focus on building a stronger business,” Marvin Ellison, Lowe’s chief executive, said in a statement.

The stores, which average 112,000 square feet for a typical Lowe’s site, join a ballooning cluster of big-box stores that have gone dark in recent months, including Sears and Kmart locations, Toys “R” Us sites and the group of department stores that fell under the Bon-Ton Stores Inc. umbrella.

Craig Patterson, editor of Retail Insider, a Canadian retail industry publication, said it's clear Lowe's was worried about competing with itself in some Canadian markets.

"If you look at the list of stores here, it looks like they didn't want to cannibalize its Canadian sales," he said.

When Lowe's acquired Rona, it had committed at the time to maintaining Rona's multiple retail store banners.

"There is just so much retail space that has come to Canada in the last three years. Target closed its doors releasing millions of square feet, and it was the same thing again with Sears Canada in 2018," he said.

The Lowe’s move comes fewer than three months after Ellison announced plans to board up all 99 of its Orchard Supply Hardware stores, which were purchased out of bankruptcy five years ago. It was part of an effort to “simplify the business to produce better results and more consistent results,” he said on the second-quarter conference call in August.

He might not be finished cutting: “The company’s strategic reassessment is ongoing as we will evaluate the productivity of our real estate portfolio and our non-retail business investments. Going forward, our goal is simple. We plan to deploy both human and capital resources to their highest and best use,” Ellison added.

Ellison joined Lowe’s in July after an almost three-year stint at J.C. Penney’s. Before that, he had spent a dozen years at Home Depot and is widely credited with helping turn that business around. He replaced Robert Niblock, who retired after activist shareholders fought to get three members appointed to the board to push an agenda to step up sales and profits.

Lowe’s, which had more stores than Home Depot at the end of the second quarter, has grown amid a sharp increase in home remodeling and home building in recent years. But it hasn’t held pace with Home Depot.

In the second quarter, Lowe’s reported total sales of $20.88 billion, up 7.1 percent from the same time a year earlier, most from sales at its 2,390 stores. Home Depot’s total sales reached $30.46 billion, an 8.4 percent jump over the prior year, also mostly from its 2,286 stores.

Lowe’s said the wind down of the North American sites will subtract $300 million to $350 million in related costs. Some of the locations will be closed down immediately, with the rest by February. Lowe’s booked a $230 million noncash pre-tax charge in the second quarter tied to the reassessment of the Orchard Supply chain, and said it expects to take from $390 million to $475 million in writedowns in the second half also linked to Orchard Supply.

Here are the Lowe’s and Rona stores to be closed:

U.S.

AlabamaLowe’s of Graysville

CaliforniaLowe’s of Aliso ViejoLowe’s of IrvineLowe’s of South San FranciscoLowe’s of Central San Jose, CA (Store 2842)

ConnecticutLowe’s of Orange

IllinoisLowe’s of Granite CityLowe’s of Gurnee

IndianaLowe’s of Portage

LouisianaLowe’s of E. New Orleans

MassachusettsLowe’s of Quincy

MichiganLowe’s of BurtonLowe’s of Flint

MinnesotaLowe’s of Mankato

MissouriLowe’s of BridgetonLowe’s of Florissant

New YorkLowe’s of Manhattan – Upper West Side Lowe’s of Manhattan – Chelsea

Amazon Exec Responds To HQ2 Rumors on Twitter

NOVEMBER 03, 2018

By Jaquelyn Ryan

Report Says Online Giant Negotiating With Northern Virginia Officials

Amazon headquarters in Seattle.

The tweet followed a Washington Post article headlined " Amazon in advanced talks about HQ2 in Northern Virginia, those close to the process say " on Saturday morning that suggested the firm is closing in on a decision to locate to the area. The Wall Street Journal reported that late-stage talks have continued in cities such as Dallas and New York as well. Some have decried the lack of transparency in a process that could lead to promises of millions of dollars in public funding and other inducements. Grella, who works for Amazon's web services unit, is not involved in the search and is not part of internal discussions on the subject, according to one source who commented on the condition they not be named. Grella did not immediately respond to a request for comment. An Amazon media representative declined to comment, as did a representative for the Crystal City developer JBG Smith.

Amazon began a national competition as part of its search for a second headquarters last year, prompting 238 cities across the nation and Canada to court the company. It announced a short-list of 20 contenders this year that includes three Washington, D.C., areas. The company has said the second headquarters could bring 50,000 jobs and $5 billion in capital spending that could boost real estate and economic growth in the city where it lands.

Northern Virginia has largely been the leading choice among site selection experts, executives familiar with the company and even gamblers on betting sites. The company has been revisiting a number of sites such as Miami and Chicago in recent weeks that are on its short-list of final contenders.

On Thursday, Amazon Chief Executive Jeffrey P. Bezos told a crowd at a New York conference that he has not made a final decision yet. "Ultimately, the decision will be made with intuition after gathering and studying a lot of data. For a decision like that, as far as I know, the best way to make it is you collect as much data as you can, you immerse yourself in the that data but then you make the decision with your heart," he said.

Many observers and real estate executives speculate the company will not announce a final decision about its HQ2 location until after the mid-term elections on Nov. 6.

Houston Rethinks the Spread of Parking Lots

NOVEMBER 01, 2018

Parking requirements in Houston have shaped the city by forcing buildings to be built further apart, which critics say has led to sprawl.

After decades of building, Houston may be coming together to tackle a rule that irks developers and leads to an abundance of one amenity that builders argue isn't needed: parking.

America's fourth-largest city is considering a proposal that would exempt two up-and-coming neighborhoods adjacent to downtown from minimum requirements for off-street parking. If adopted, developers will be able to expand where they can build lucrative, higher-density projects.

"One of the most difficult things for post-World War II cities to deal with, Houston in particular, is having parking requirements that are too large. It pushes apart the projects and creates sprawl," said Peter Merwin, principal who helps lead mixed-use projects at architecture and design firm Gensler. "Currently over 50 percent of land use [in Houston] is dedicated to parking or roadways. That has a tremendous impact on the look of the city, usability and quality of life."

Midtown and East Downtown, known as Eado, two areas with robust development in the past decade, have been proposed as extensions of downtown, allowing new projects to be built without requiring a large amount of off-street parking, or any off-street parking at all. With close to 15,000 people in the neighborhoods living alongside dozens of popular entertainment and dining destinations, the move would be a game changer for developers in Houston.

"We're having to accommodate this giant elephant in the room, the gray parking structure," said Merwin.

Houston's current code outside of downtown requires 1.66 parking spaces for each two-bedroom apartment. Office buildings must provide 2.5 spaces for every 1,000 square feet. Hospitals are required to provide 2.2 spots for each bed, and golf courses need five spots for each green.

Even Houston’s bars have parking requirements, the highest of any use: 10 spots per 1,000 square feet.

"It's idiocy if the city is trying to protect the health of citizens, and a bar has minimum parking requirements," Merwin said. "Encouraging ease to get to and from a bar by offering parking sounds like asking for trouble to me."

Often thought of as bureaucratic red tape between the city and developers, Houston’s parking minimums have fundamentally shaped the city, contributing to its iconic sprawl now stretching 627 square miles.

Despite boasts about being a low-regulation city, the parking requirements remain fairly high by national standards, according to Streetsblog USA, a website that reports on sustainable transportation and livable communities.

Making matters more complicated for business and development, the rules are based on gross floor area, not net floor area, meaning mechanical rooms, bathrooms, hallways and storage areas factor in to the number of spots that must be provided.

It would be one thing if the spots were being used, but there’s evidence they are not, as transportation analysts forecast people will be driving less in the future.

Granite Properties, a real estate services firm based in Plano, Texas, conducted a study of 23 Class A buildings in Houston totaling 7 million square feet, revealing that 37.7 percent of parking spots sit unused on an average day, with the peak hour of a peak day used as a measuring point. Granite picked weeks without holidays, and the study ended in May before summer vacation season started.

The value of those unused spots combined is more than $100 million, Granite said.

"We know we're using fewer and fewer spaces because of flex time, working from home, traveling and all the other means of working," said David Cunningham, Granite's director of development and construction. "Plus people have alternative means of getting to work."

By 2030, private car ownership will drop 80 percent, and the cost of electric ride-sharing will be four to 10 times cheaper than owning a car, according to a Transwestern report on the rise of autonomous vehicles.

Fewer cars on the road would mean a dramatic reduction in parking needs. In estimates of autonomous vehicle technology are correct, the demand for parking across the United States may decrease 70 percent to 90 percent, cutting the need for parking spaces by about 60 billion square feet, according to conference on the subject sponsored by NAIOP, a commercial real estate trade group.

Architects and developers are already designing parking structures that can easily be converted to other uses, such as office space, retail or storage. Gensler’s Merwin has been a leader in the global firm’s practice on parking conversion.

“I can tell you, every project I’m working on, I talk about the future of garages in the development,” Merwin said.

If you look at Houston as a grid, the ratio of private space to public space is roughly 57 percent to 43 percent. That 43 percent of public land use is dedicated mostly to roads. When you build additional roadways and lots on private land, that 43 percent tips closer to 60 percent, according to Merwin. In other words, almost 60 percent of Houston’s land use is dedicated to cars.

"There's this latent capacity for underutilized or misused land, that if we can convert to more productive real estate, will be huge." Merwin said.

Central Houston President Bob Eury, whose group of business leaders promotes the downtown, told Houston Public Media this year that there are still at least 30 surface parking lots in downtown alone that could be developed.

"The upside is reduced cost of projects, so it makes it more feasible to get projects done. You could take the wasted investment in parking and build better buildings, more efficient buildings, with more amenities," Cunningham said.

Developments under the current regulations look like Australia-based Caydon’s 26-story mixed-use residential tower , Midtown’s first high-rise in decades, which will have almost 500 parking spots for 347 units. With more work from Caydon to come on adjacent lots, the city's new parking amendments could open up more options for the developer.

Directly across Main Street from Caydon’s project is the Midtown Park 400-space underground parking garage owned by the city of Houston. Despite the affordable rates, the garage is rarely close to full, even on busy weekends, according to Cunningham.

"The city is begging people to use that garage," he said.

That lack of inter-connected development driven by parking requirements is a major part of the problem. Parking requirements promote "silo-style" development, Merwin said. Each property has its own separate usage and parking, eliminating any space-saving synergy. When Caydon pursues its additional developments, under the current requirements it would need to also build parking on-site. Caydon Chief Operations Officer Derrek LeRouax has been vocal at public meetings in support of the parking changes.

"Having the ability to not be required to build is an important move, then you can leave it up to the free market," Cunningham said. "You won’t have to do it simply because of some outdated code saying you have to do it. If you can allow developers to build less, they will."

Tied up in the debate over parking and sprawl are concerns around flooding. Houston's abundance of impermeable concrete surface parking lots came under fire last year in the wake of Hurricane Harvey. The national news media questioned how developers could be allowed to build in flood zones.

Local officials in Midtown and East Downtown say they support the proposed change to parking rules. A 30-day public comment period is currently in place before the City Council gets final say in a vote that could take place before the end of the year.

The proposal came out of the Walkable Places Committee, a task force established by Mayor Sylvester Turner to consider revisions to the city code to encourage more walkable neighborhoods. The committee has also looked at changing building codes to allow new construction to be closer together and to allow for wider sidewalks, but Houston’s lack of zoning would make applying those policy changes difficult.

"I hate wastefulness, wastefulness is a sin. When we're spending time and resources to finance building all these parking spots that could be used on other things, that's wasteful," Cunningham said.

OCTOBER 22, 2018

By Mark Heschmeyer

Incentives Aim to Spur Investment in Distressed Areas

The Internal Revenue Service will be examining new guidance on the Opportunity Zone real estate tax incentive program.

Accountants poring over the Treasury Department's newly issued guidelines for Opportunity Zone tax incentives say they are uncovering additional benefits for commercial real estate investors such as allowing borrowed funds to be used for improvements.

The incentives created by the 2017 Tax Cuts and Jobs Act are designed to spur development and job creation by encouraging long-term investments in economically distressed areas and is under review by the Internal Revenue Service. The proposed regulations are designed to help investors and fund managers put billions of dollars in capital gains earnings to work by clarifying what can be deferred, which taxpayers and investments are eligible and how to invest the money.

Analysis from the law firm of Polsinelli PC notes that the guidance released on Friday clarifies the treatment of land in opportunity zones. Land is excluded from the requirement of original use, alleviating fears that land could only be a "bad" asset. If a qualified fund purchases an existing building and the underlying land, the fund is only required to substantially improve the building. The cost of the land is disregarded for this purpose.

Polsinelli's analysis also indicates the proposed regulations provide for the borrowing of funds for investment and improvements. There had been concern that the proportion of the investment relating to money borrowed by a qualified fund would result in a non-qualifying investment.

The law firm of Stroock & Stroock & Lavan said the regulations probably permit investments from limited liability corporations and not just individuals. The proposed regulations state that qualified opportunity funds may include entities treated as partnerships for federal income tax purposes, which would presumably permit the use of limited liability companies.

The proposed regulations also indicate that partners in opportunity zone funds do get outside basis for amounts borrowed by the fund, thereby potentially permitting the investors to take advantage of any potential fund losses in the investments, according Polsinelli analysis.

In issuing the guidelines, the Treasury said it expects to issue additional guidance before the end of 2018, and the IRS has requested comments on a number of provisions in the proposed regulations.

Issues expected to be addressed in the next round include: the meaning of the law's use of the phrase "substantially all;" the transactions that may trigger the inclusion of gain that has been deferred; the "reasonable period" for a qualified opportunity fund to reinvest proceeds from the sale of qualifying assets without paying a penalty; and what happens when a qualified fund fails to maintain the required 90 percent investment standard.

Key among the first round of regulations is that it extends the length of the benefits of the program that offers capital gains tax relief to investors for new investment in designated areas.

Investment benefits include deferral of tax on prior gains as late as 2026 if the amount of the gain is invested in an Opportunity Fund, and tax forgiveness on gains on that investment if the investor holds the investment for at least 10 years. Now, the Treasury says investors can hold onto their investments in Qualified Opportunity Funds through 2047 without losing tax benefits.

The additional hold period is provided to avoid the potential that a flood of property investments would have hit the market shortly after completion of the required 10-year holding period.

To Create the Offices of Tomorrow, This Design Director Scrapped the Cubicle

OCTOBER 19, 2018

L'Oreal workspace designed to boost collaboration gives a glimpse of the office of the future.

To catch a glimpse of the workplace of the future, Ware Malcomb Interior Architecture & Design Director Heather Groff suggests looking at the headquarters she worked on for cosmetics and perfume maker L'Oréal. The 66,000-square-foot office in Clark, New Jersey, which the company dubbed "The Hub," banishes a staple of traditional office life: the cubicle.

Because its workforce is entirely mobile, L'Oréal wanted an activity-based environment, meaning there is no traditional cubicle space. Instead, a flex-space concept converts usable space from private offices and desks to unassigned open work areas designed to emphasize collaboration and social interaction.

"Each department had a distinct theme or 'neighborhood' designed into the new workplace," said Groff.

Alternative work areas replaced most of the enclosed offices, Groff said, adding that, "This is a big trend in commercial interiors: creating that community and coffee shop- or living room-like environment. It’s not just computer desks."

Groff's design ideas may affect the offices that many U.S. workers use in a decade or two. More than 80 percent of companies in the United States are considering moving toward an open, flexible concept with a variety of work areas, according to a 2014 report on workplace redesigns by research firm Deloitte. In a 2015 office worker survey conducted by the Dublin Institute of Technology, respondents aged 20 to 34 were shown to have less difficulty concentrating while working within an open office plan than respondents in the age groups of 35 to 44 and 45 to 54. Almost 50 percent of respondents said a more open design had a positive effect on productivity.

Groff’s 20-year career has taken her to both coasts. Shortly after graduating with a bachelor’s degree in interior design from Boston’s Wentworth Institute of Technology, she moved to San Francisco and later to New York, where she joined architecture and design firm Ware Malcomb in 2014 as a studio manager. Ware Malcomb promoted Groff this year to lead its Design Studio and essentially run its New York operations.

Her work for startup consulting company Bionic took a similar approach to L'Oreal, but to a lesser extent, in building a 10,000-square-foot office at 4 Columbus Circle in New York City.

To catch a glimpse of the workplace of the future, Ware Malcomb Interior Architecture & Design Director Heather Groff suggests looking at the headquarters she worked on for cosmetics and perfume maker L'Oréal. The 66,000-square-foot office in Clark, New Jersey, which the company dubbed "The Hub," banishes a staple of traditional office life: the cubicle.

Because its workforce is entirely mobile, L'Oréal wanted an activity-based environment, meaning there is no traditional cubicle space. Instead, a flex-space concept converts usable space from private offices and desks to unassigned open work areas designed to emphasize collaboration and social interaction.

"Each department had a distinct theme or 'neighborhood' designed into the new workplace," said Groff.

Alternative work areas replaced most of the enclosed offices, Groff said, adding that, "This is a big trend in commercial interiors: creating that community and coffee shop- or living room-like environment. It’s not just computer desks."

Groff's design ideas may affect the offices that many U.S. workers use in a decade or two. More than 80 percent of companies in the United States are considering moving toward an open, flexible concept with a variety of work areas, according to a 2014 report on workplace redesigns by research firm Deloitte. In a 2015 office worker survey conducted by the Dublin Institute of Technology, respondents aged 20 to 34 were shown to have less difficulty concentrating while working within an open office plan than respondents in the age groups of 35 to 44 and 45 to 54. Almost 50 percent of respondents said a more open design had a positive effect on productivity.

Groff’s 20-year career has taken her to both coasts. Shortly after graduating with a bachelor’s degree in interior design from Boston’s Wentworth Institute of Technology, she moved to San Francisco and later to New York, where she joined architecture and design firm Ware Malcomb in 2014 as a studio manager. Ware Malcomb promoted Groff this year to lead its Design Studio and essentially run its New York operations.

Her work for startup consulting company Bionic took a similar approach to L'Oreal, but to a lesser extent, in building a 10,000-square-foot office at 4 Columbus Circle in New York City.

Heather Groff

"The plan for Bionic is to transition to an activity-based workstyle," Groff said. "They have bench desk areas and other collaborative areas that are alternative environments for a change of scenery. As they grow, they will shift to unassigned workplaces."

Through her work on these projects, Groff developed the concept of an activity-based work spectrum. "Companies fall along a spectrum of traditional on one end, to really what L'Oréal has done on the other end. Lots of companies fit in the middle along different gradients," she said.

Groff said she is building workplace experiences into Ware Malcomb’s Workplace Strategy group, which collects information on what clients want and organizes it into more cohesive styles.

"In the past, office redesigns were driven by an expansion or a lease expiration and need for space. The process was very cut and dry. You collected the number of people, their role, and they would get a predefined workspace. Workspace Strategy takes into account the other goals that the company wants to achieve within their physical environment," Groff said.

Corporate interiors have significantly changed in the past several years, according to Groff, who tracks trends for Ware Malcomb. Her research has shown that while the overarching themes in interior architecture remain relatively stable, nuances within them have changed, creating different design approaches.

Take technology, for example. Five years ago, worker mobility throughout an office was the major emerging trend in technology affecting workplace design, according to Groff, but mobility is now expected.

"The shift in the technology conversation is now that you are mobile, you have new barriers to overcome," she said.

Desk reservation systems are now key to a mobile, modern workforce.

"So at L'Oréal, the workforce is entirely mobile," Groff explained. "The desk reservation system really helps to make their workday seamless, make sure employees going in and out always have a place to work and can easily locate coworkers."

There's a movement toward collecting data on how the workplace is used. It's no longer enough to design an office and move on to the next project. In coming years, it will be increasingly important to catalogue how many people are in the space, how long they were there and what they were doing, Groff explains.

OCTOBER 11, 2018

Florida Beach Towns Hammered By Most Powerful Panhandle Hurricane on Record

The commercial property in the area struck by Hurricane Michael spans the Florida panhandle along the Gulf of Mexico.

Hurricane Michael smashed into beach resorts, shopping centers, apartments and office buildings with 155-mile-per-hour winds and rising seas, threatening more than $25 billion in commercial property along the Florida Panhandle.

The 500-mile stretch of coastline includes about 18,000 commercial buildings valued at $25.5 billion at risk of flooding by surging storm water up to six feet above ground level when the largest hurricane on record to hit the Panhandle reached land near Panama City, Florida, late Wednesday, according to a CoStar Group analysis of property data and recent sales information.

Initial reports suggest the hurricane largely spared the major population centers of Pensacola and St. Petersburg, which bookended the storm's landfall. However, local news reports and social media showed widespread flooding, massive debris fields and numerous destroyed or heavily damaged buildings in Panama City, Mexico Beach, Port St. Joe and other white-sand resort getaways. Early reports said at least two people were killed.

More than 331,000 homes and businesses lost power and up to 375,000 people along the Gulf Coast in 22 Florida counties were ordered or strongly urged to evacuate. Wind and heavy rain from the Category 4 storm, only the third hurricane to hit the Panhandle since 1950, also caused major damage as it moved inland into Georgia and Alabama.

Retail and multifamily properties were the largest groups of properties in the loan pools exposed to damage, with retail accounting for about 40 percent and multifamily at 20.5 percent of the total, Moody's Vice President Matthew Halpern said.

Hurricane Michael when it made landfall on Wednesday. Credit: NOAA/CIRA/RAMMB

One of the towns hit the hardest by the hurricane, Panama City Beach, which is southwest of the state capital of Tallahassee, is a resort town known for its emerald-green waters and white-sand beaches. It’s a popular wedding venue with gazebos along the shoreline.

The town also attracts budget-conscious spring breakers who frequent the area’s relatively inexpensive hotels within walking distance of bars and clubs. Live beach cams showed precariously bending palm trees, pelting rain and scattered debris as the hurricane made landfall.

News reports said at least two people were killed, including a child in a mobile home park, with the death toll expected to rise as rescue workers search for bodies during the rubble.

Michael was downgraded to a tropical storm early Thursday as it trekked across the U.S. Southeast, bringing more rain to areas that can ill afford it. North Carolina still is recovering from Hurricane Florence, which roared ashore last month in Wilmington, causing major flooding.

Some Florida residents are concerned about an increasing frequency of hurricanes after Hurricane Irma slammed the state last year as a Category 4 storm. But while Irma and Michael have hit Florida in consecutive years, the prior 10 years were relatively quiet, said Michael Peltier, spokesman for state-run Citizens Property Insurance Corp., the No. 2 insurer in Florida with about 442,100 policies. Universal Property & Casualty Insurance Co. ranks first with more than 631,000 policies, according to the Florida Office of Insurance Regulation.

“Florida continues to have a lot of development along the coast,” Peltier told CoStar News. “In that sense, we will always be vulnerable to severe weather.”

OCTOBER 02, 2018

With Fresh Capital, Developers Combine Marijuana Operations Under One Roof

AmeriCann Inc. is building a planned 987,000-square-foot cannabis campus 30 miles northeast of Providence, Rhode Island.

Entrepreneurs are building modern cannabis campuses in response to what some real estate brokers call a green rush that's driving up occupancy rates and prices of property suited to cultivating and making products in California, Colorado and other marijuana-friendly states.

A new crop of capital providers has cautiously stepped forward to provide financing for cannabis real estate ventures, cognizant the nascent industry's legal and regulatory status remains murky. The federal government classifies marijuana as a Schedule 1 illegal drug even as 29 states have legalized medical cannabis use. Recreational use is now permitted by state governments in Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington and the District of Columbia.

Since Colorado in 2012 became the first state to legalize the use of marijuana on a recreational basis, the other states have followed, driving up demand for pot beyond medical uses and spawning new businesses. In response to regulations limiting the size and location of cannabis cultivation, entrepreneurs are adopting a mixed-use development approach, combining the operations of growers, manufacturers, sellers and other tenants in campus-style projects of as many as 1 million square feet.

In the latest project to break ground, Denver-based AmeriCann Inc., a publicly traded designer, builder and financier of projects for marijuana businesses, broke ground in the past week on the first phase of the Massachusetts Medical Cannabis Center, a 987,000-square-foot cannabis campus on 52 acres in Freetown, Massachusetts, that will lease to as many as eight growers and processors.

The initial project in Freetown, located 30 miles northwest of Providence, Rhode Island, is planned as a 30,000-square-foot cultivation and research center scheduled to open next spring. Over the next couple of years, the operation is expected to reach nearly 1 million square feet across three buildings, according to AmeriCann Chief Executive Tim Keogh.

"One of the biggest problems for the cannabis business is finding suitable commercial properties," Keogh said in an interview. "The campus format solves two big problems: how and where are companies going to grow and process the product. We've spent several years de-risking this type of asset and creating a platform for bringing efficient, low-cost cannabis buildings and infrastructure to the market."

The new facility will use greenhouses flooded with natural sunlight, which Keogh said is superior to the converted warehouses with artificial light traditionally used by growers, which incur high energy and other utility costs.

In the Coachella Valley community of Cathedral City, California, Canada-based Sunniva has started construction on two buildings totaling almost 500,000 square feet. The company plans to employ 100 people in the Coachella Valley, home to hundreds of small cannabis sellers and growers as well as the famous Coachella Valley Music and Arts Festival.

A couple hundred miles north, Canna-Hub, a Roseville, California-based developer, broke ground in July on a 16-acre facility in Mendota aspiring to be what Chief Executive Tim McGraw describes as the "cannabis center of the Central Valley."

Foreign investment and a small but increasing stream of institutional capital are helping fund the developments as cannabis makes a steady but uneven maturation into an industry embraced by mainstream financial markets.

Many of the California cannabis-related projects are fueled by foreign capital, according to Hilary Bricken, an attorney at Los Angeles-based law firm Harris Bricken PLLC, which represents marijuana businesses of all sizes in several states.

Bracken said she’s fielding inquiries from foreign investors in Israel, Canada, Spain, South America, The Netherlands, the United Kingdom and Germany interested in cannabis-related manufacturing and growing operations, especially in the Coachella Valley cities in Riverside County.

"We've seen large amounts of foreign money come in for cannabis real estate projects, especially in the Coachella Valley and certain desert cities," Bracken said. "In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities and more to offer turnkey cultivation and processing facilities for lease to local businesses."

Other real estate investors are also looking to fill the void left by conventional lenders unwilling to take a chance on the uncertain legal status of the nascent industry.

Newport Beach, California-based Pelorus Equity Group on Sept. 18 launched a $100 million fund offering loans for acquisition, construction and improvement of commercial and industrial buildings to established cannabis businesses. Pelorus just closed a $25 million fund raised from wealthy investors and their advisory firms, allocating all the proceeds to 13 real estate projects throughout California.

"As demand for cannabis products soars, large-scale cultivation, production and delivery systems will be required,” said Kelly Oliver, senior analyst at market research firm IBISWorld. “As a result, the next five years are expected to be defined by the increased involvement of large corporations and heavy merger and acquisition activity.”

Keogh said his company is getting in on the ground floor before large institutional money floods into the sector.

"If it's all institutional capital, all the opportunities are taken advantage of and there's no arbitrage," Keogh said. "We're in that sweet spot where there's an opportunity to build the infrastructure and expand our footprint. Then, as institutional capital really warms up to cannabis, we're in a very exciting spot to take advantage of that."

Female-Focused Coworking on The Rise

OCTOBER 02, 2018

By Molly Armbrister

Women-Centric Spaces Pop Up Coast to Coast

As social and professional lives blur, female-centric coworking companies are quickly expanding across the country.

Stacey Taubman is working to open a second location of her almost two-year-old women-centric coworking company called Rise Collaborative, one of a fast-growing number of female-focused shared office space providers across the United States.

Taubman, a former high school math teacher in St. Louis, said she discovered a need for female-focused office space several years ago. The revelation came as she interviewed more than 300 women to be part of a tutoring and mentorship company for teen girls that she developed following the suicide of one of her female students.

The result was Rise Collaborative, a shared workspace provider aimed at women-led businesses that opened its first location in St. Louis in February 2017. Now, she’s planned another location to open in Denver next year.

Stacy Taubman will open a second Rise Collaborative location in Denver; Photo credit: Rise Collaborative

"It’s common for women in business to crave connections with other women who inspire and understand them," she said of the St. Louis office. "These ambitious and successful women are also looking for opportunities to grow personally and professionally."

Women-centric co-working companies are in vogue in tech-friendly markets across the country right now, though they have sparked some concern whether it's fair to favor one sex in creating workplaces. The Wing, perhaps the best-known of these, opened its first location at roughly the same time as Rise and has been on a growth tear ever since, completing a round of funding in fall 2017 led by international co-working giant WeWork that raised $32 million.

Reliable data on female-centric coworking spaces is hard to come by, but the number of these companies is growing, as is the list of cities where they can be found.

The Riveter, The Hivery and Hera Hub are a few of the other female-oriented coworking spaces that have opened in markets such as Southern California, Washington, D.C., Seattle and New York City as the co-working trend has grown in recent years.

Taubman said she plans to open her second location, at 730 Colorado Blvd. in Denver, because the pool of women who could benefit from a female-centric coworking space is even larger in Denver than it is in St. Louis.

St. Louis has 72,000 women business owners with no employees, Taubman said. Denver has 88,000.

The 10,000-square-foot space in Denver is expected to include 14 private offices, free parking, three conference rooms and other amenities. Applications for the space can be submitted beginning Oct. 1.

Taubman said she considered as many as 10 other cities when looking for a second spot to open one of her coworking spaces. She plans to open the Denver office and immediately get to work fundraising to roll out in other markets she had considered.

In general, female-focused coworking offices cater to women who fall into two camps, said Kay Sargent, senior principal and director of workplace at HOK, the St. Louis-based engineering and architecture firm. Generally, there are some coworking spaces that cater to working moms and others that cater to women who either don’t have children or for whom childcare is not a concern, Sargent said.

"Some women in fields that tend to be male-centric don’t like the pressure of that," Sargent said. "There’s camaraderie. They want to be able to relate to people with the same challenges. They can support each other."

Finding ways to make the workplace more female-friendly has tremendous potential in a national economy where the unemployment rate is less than 4 percent and companies are struggling to find workers, Sargent said.

"They’re supporting lifestyle choices that women want to make," she said. "There’s a workforce shortage, and there are a lot of highly educated women who want to work. They’re trying to find alternatives. Women want more options, more choices, more things that are responsive to needs and changes."

On the other hand, Sargent said, diverse workplaces are often catalysts for better ideas and more productive staffs.

"It’s the idea of ‘if you want to be included, don’t segregate yourself,’" Sargent said. "If you’re doing it to avoid something, you’re not addressing what the core problem is."

But, if the idea is to create a like-minded community where ideas can flow and work and life can blend together, Sargent said, gender-specific co-working spaces have a place. They can help women find their circle.

"We used to be able to find community outside of work," Sargent said. "There is a huge blending between our personal and professional lives. We’re working more and that’s infiltrated our personal lives. For people who want to blend work and personal, female-centric can be a great solution to that."

But the concerns about gender-specific workspaces can go beyond social and professional realms into the legal arena.

The New York City Commission on Human Rights began investigating The Wing earlier this year over its women-only policy. Rules vary by state, but in New York, The Wing argues that as a private club, it is not subject to public accommodation laws.

"Our spaces are female-friendly, but men are allowed," Taubman said. Some of the companies in the St. Louis Rise have male employees, she said, but the companies are run by women.

And still, perhaps the most important piece of what goes on at Rise focuses on young women and helping them discover their paths in life.

Rise Collaborative’s nonprofit arm, Rise Society, enrolls high school girls in a mentorship program that matches them with an adult member of Rise Collaborative who can provide advice and support about career and personal interests.

"We believe that you can’t be what you can’t see," Taubman said. "We are creating a pipeline for success by providing a collaborative space for teen girls to engage with smart, strong, successful women who want to give back to the next generation.

World Growth Forecast Cut on U.S.-China Trade Battle

SEPTEMBER 27, 2018

By Mark Heschmeyer

Trade War Is Becoming a Reality, Economists Say

With the latest and largest round of tariffs on imported Chinese goods taking effect this week, economists say U.S. trade policies are likely to materially affect residential and commercial real estate markets as well as what remains of a strong global growth outlook.

"This latest round of tariffs pulls consumers' homes into the middle of an international trade dispute," said Jennifer Cleary, vice president of regulatory affairs for the Association of Home Appliance Manufacturers. "These tariffs, in addition to the tariffs on imported steel and aluminum upon which home appliance manufacturers in the U.S. rely, are taxes. And higher prices for American consumers is the likely result of increased costs to import home appliances and the parts and materials needed to make and service them in America. American manufacturing jobs could also be lost."

The rate of additional duty is initially 10 percent. On Jan. 1, 2019, the rate of additional duty will increase to 25 percent.

Housing costs will only go up, according to Randy Noel, chairman of the National Association of Home Builders and a custom home builder from LaPlace, Louisiana.

"President Trump's decision to impose 10 percent tariffs on $200 billion worth of Chinese imports, including $10 billion of goods used by the residential construction sector, could have major ramifications for the housing industry," Noel said in a statement. "Further, this tax increase is coming on top of the current 20 percent tariffs on softwood lumber imports from Canada. The lumber tariffs have already added thousands of dollars to the price of a typical single-family home."

Other economists agree that the escalating trade dispute is slowing growth. The UCLA Anderson Forecast for the third-quarter report released Wednesday questions whether even slowing growth is sustainable.

The national economic forecast over the near term remains strong, with a broad-based 3 percent growth track, according to David Shulman, UCLA Anderson Forecast senior economist. However, it is expected to slow to 2 percent next year and to a near-recession level of 1 percent in 2020.

Looming over the forecast is the uncertainty of what affect tariffs will have on business investment, Shulman wrote.

"However, one thing remains clear. The trade deficit is going to explode," Shulman wrote. "What the administration doesn't understand is that the trade deficit is largely a result of macroeconomic policies caused by the lack of domestic savings and the ever-growing budget deficit."

The auto industry is already taking a hit from earlier tariffs, according to industry officials testifying Wednesday at a U.S. Senate Finance Committee Hearing on the impact of tariffs on the U.S. automotive industry.

Next year will mark two key milestones in Honda North America's history in the United States. It will be the 60th anniversary of Honda's business in America and the 40th anniversary of the first product it built in America. There are two critical factors that have helped it reach those milestones: stability and maintaining a welcoming business environment that supports manufacturing, Rick Schostek, executive vice president of Honda North America, said in his testimony on Wednesday.

Stability is where unanticipated disruptions like new taxes in the form of tariffs come in, he said.

"These added costs will either be passed on to our customers or borne by manufacturers, which then diverts money intended for other critical purposes, including investment in future technologies, or capital improvements to our operations that secure jobs, provide compensation for our workforce, and fulfill our social responsibility to the community," Schostek said. "The key point is that tariffs, no matter how short-lived, are enormously disruptive to the stability of a business."

Regarding a business-friendly environment, America is now experiencing a fundamental change in the philosophy of open markets, he said.

"While we're paying relatively little in the way of tariffs on steel, the price of domestic steel has increased as a result of the tariff, saddling us with hundreds of millions of dollars in new, unplanned costs," he said.

While the full price effects of the tariffs have yet to hit consumers, they are slowly beginning to have an effect on business decisions being made in the commercial real estate industry, too.

This week, Forest City Realty sent out proxy voting materials to its shareholders to approve its planned $11.4 billion merger with Brookfield Asset Management. Those materials spelled out all the reasons why Forest City Realty's board approved the merger. The top reason listed was this:

"Our board's knowledge of our business, operations, financial condition, earnings and prospects, as well as our board's knowledge of our operating environment, including current and prospective economic and market conditions at that time (including expectations regarding the impact of tariffs or other trade protection measures that could be implemented by the current administration)."

Forest City officials said they could not elaborate what the specific negative impacts were expected and had to let the language in the voting materials stand as written.

SEPTEMBER 10, 2018

Survey Finds Other Companies May Follow Amazon’s Lead and Make Cities Vie for Their Facilities

A new survey says Amazon will locate its second headquarters in Northern Virginia. Pictured is Amazon's Seattle campus.

Most experts who advise companies on real estate strategies say online retailer Amazon will choose Northern Virginia, Washington, D.C., or Atlanta for the location of its second headquarters from among 20 finalist cities vying for the estimated $5 billion project.

A survey by New York City-based Development Counsellors International, an economic development and marketing organization, found that 60 percent of respondents predicted Northern Virginia would be Amazon's top choice, though it added that "current wisdom is that the online retail giant will make a further cut to four to six finalists cities" before choosing a winner. Washington, D.C., was No. 2, with 53 percent, followed by Atlanta at No. 3, with 51 percent.

The rest of the candidates received less than 50 percent of the responses. Boston and Toronto tied for No. 4, Dallas was No. 5, and Montgomery County, Maryland, Newark, Chicago and Austin, Texas, rounded out the top 10.

Amazon, the world’s largest online retailer, has said its second headquarters will employ 50,000 people within about 10 years and produce $5 billion in capital spending. The company started out with bids from 238 cities and it narrowed the list to 20 finalists, and its announcement of the final city could come anytime before Jan. 1.

The study found that 47 percent of site-selection consultants across the country predicted that other companies would like Amazon's approach so much they would copy the strategy and ask regions to submit bids for any key relocations or new facilities.

If Amazon chooses Northern Virginia, its offices would be located at Data Center Alley, near Dulles National Airport. According to CoStar data, new transportation systems are already in the works, and Google recently purchased 91 acres in the area, where it plans to build a data center. The area is dominated by technology and data center companies, CoStar said.

The survey said the benefits of Northern Virginia included proximity to the federal government, the airport and a highly trained technology workforce. The negatives include a lack of infrastructure, traffic congestion and "lack of an urban core."

Jim Beatty, president of NCS International -- which provides site selection and real estate services to corporations, but has not worked with Amazon -- agreed with the findings, except that Toronto wasn’t on his list.

"I don’t see Amazon going to Canada," he said, adding that the company would most likely stick within the United States.

SEPTEMBER 06, 2018

The Olmsted apartments in Nashville, Tennessee, purchased by Newgard Development Group last month and rebranded as an Airbnb rental building.

Some landlords across the U.S. and Canada may discourage tenants from subletting on Airbnb. But not Toronto-based Brookfield Asset Management, which figures it can reap as much as an extra 3 percentage points in return, taking a share of the extra cash tenants earn.

Jonathan Moore, managing director of Brookfield's real estate group with responsibility for multifamily investments, told the Canadian Apartment Investment Conference this week his company will encourage the activity in two apartment buildings in Nashville, Tennessee, and Kissimmee, Florida.

It may seem incongruous that Brookfield, the world's largest real estate investment company with assets of $196 billion in U.S. dollars, is trying to take a share of some extra cash from apartment dwellers. But as a multinational corporation, those fees can add up.

"It's a bit of what some of my colleagues call a science experiment," said Moore about the partnership agreement that has seen Brookfield invest US$200 million in a joint venture with Niido, the multifamily development venture of Airbnb. "Not only will we not forbid it like most landlords out there, we are going to encourage it. We are actually going to attract that consumer by way of programming, technology and something called a master host."

The Niido investment is targeting millennials, and Brookfield's research shows on average millennials are only in their apartments 22 of 30 days a month. "Jobs take them somewhere," says Moore. "They are never in their apartments 30 days a month."

The incentive for renters is that if they sublet out their house for just five of those empty days a month and get the average daily rate of a hotel, they can cut their rent in half. The landlord receives the other 25 percent, and Airbnb receives a fee on top of it all.

Moore said it's hard to buy multifamily real estate with a projected rate of return of more than 4 percent and "everybody is looking for extra yield," which sharing profits with tenants delivers. "Our 25 percent scrape of that home-sharing income, if you do the math, creates an increase in the levered internal rate of return" of 2 percentage points to 3 percentage points, he said.

The move by Brookfield to invest in Niido comes as the company reconsiders investments in the multifamily sector, which it started buying in 2010, creating a portfolio of about US$11 billion mostly in the United States.

"Out of the financial crisis in the U.S. people needed to rent apartments," said Moore, noting U.S. rental growth has been climbing at 4 percent to 6 percent annually while wages have only climbed 2 percent to 3 percent since the company started buying multifamily units.

"A lot of institutional money has been chasing the sector," said Moore.

With returns at historical lows, Brookfield decided it was no longer a buyer of multifamily property in 2016 and started selling. Moore conceded he probably called the peak of the sector too soon, but Brookfield nevertheless has sold US$4.5 billion in assets.

"It just feels like the end is coming," he said to the audience filled with apartment investors. "It's just not sustainable, something will break, but we don’t know what will break it."

The issue for Brookfield was what to do with the US$4.5 billion. One of the benefactors of the recycling of capital was Miami-based Niido, a subsidary of Newgard Development Group that Moore called a "small startup" with about 15 people.

The first two assets are owned by Newgard and were both rebranded Niido Powered by Airbnb. The 324-unit Florida apartment building, previously called Domain, was bought six months ago. The purchase of the 328-unit Nashville location, originally developed as Olmsted apartments, closed last month. The two cities were chosen because Airbnb users heavily desire them as tourist destinations.

"These two locations were off the charts," said Moore on the demand for Airbnb product because of a lack of supply.

The downside risk for Brookfield is limited at both locations with rents locked down by tenants, who bear the burden if they are not successful at attracting Airbnb customers.

Moore ultimately said even if the "science experiment" to encourage tenants to sublet their units and give Brookfield a piece of the action, the company has a fallback plan.

"We'll just rip it up, kick Niido out, and I’ll have a great apartment building," said Moore, adding it's not something he expects to happen. "The sharing economy is here, and it's real."

Withdrawn by Moody's were WeWork's B3 Corporate Family rating, its B3-PD Probability of Default rating and a Caa1 senior unsecured rating assigned this spring. At that time, Moody's rated the firm's outlook as stable. However, the ratings were not provided at the request of New York-based WeWork, which is controlled by affiliates of SoftBank Group Corp.

WeWork was instead working with Fitch Ratings Inc. in its issuance of $702 million in unsecured notes in April and May. Fitch gave the WeWork notes a BB long-term issuer default rating, which it maintains based on additional information WeWork provided to Fitch, according to WeWork.

WeWork said that during the issuance this year it paid for Fitch to rate WeWork but didn't hire Moody's. Even so, Moody's issued a rating on WeWork because of the high profile of the note issuance. Because WeWork didn't hire Moody's, the ratings company didn't have access to the data required to maintain a credit rating and withdrew it, WeWork said.

Moody's didn't immediately respond to a request for additional information.

Moody's said its B3 CFR rating reflected WeWork's limited operating history, lack of historical profits and Moody's expectation for no free cash flow over the next few years.

"WeWork has billions in cash and deep-pocketed private equity backing, but spending on its ambitious global growth plans mean it will likely be years before there are consolidated profits or free cash flow," Moody's stated at that time.

By achieving high occupancy of its high-density office space configurations quickly through the sale of flexible memberships to a wide variety of customers, including large enterprises, small to mid-sized business and sole proprietors, WeWork has been able typically to recoup up-front building-level investments within 12 to 18 months of opening.

Although WeWork has had high member growth and retention over the past few years, its operations are concentrated in only a few markets, such as New York City, where its office-space-as-a-service business model has proven successful.

Moody's said in the spring its B3 rating reflects concern WeWork may not achieve similarly rapid lease ups and high retention in new markets. Additional credit concerns include a lack of clear competitive differentiators from other existing and potential office-space-as-a-service providers.

The stable ratings outlook reflected Moody's anticipation that if WeWork achieved its financial plans, it would generate free cash flow by 2022.

Cosmetics Retailers Ramp Up Plans to Open Stores, Distribution Hubs as Amazon Sparks Battle for Beauty

AUGUST 22, 2018

Three specialty cosmetics retailers have ambitious brick-and-mortar expansion plans for two reasons: Many consumers want to try on makeup before they buy, and e-commerce revenue, while growing, still constitutes a fraction of overall sales.

Ulta Beauty Inc., Sephora USA and Bluemercury are all in the market for enormous amounts of physical space as they fend off increasingly aggressive competitors for a share of a global cosmetics market to be worth $805 billion by 2023, according to Orbis Research.

Ulta plans to open 100 stores by the end of the year after opening 100 last year. Rival Bluemercury, which was purchased by Macy’s in 2015, plans 25 freestanding outlets this year and another 30 within Macy’s department stores.

Sephora this summer broke ground in July on a 714,000-square-foot e-commerce and fulfillment center in North Las Vegas. It added three new brick-and-mortar stores in May and will open another this fall, and is adding stores inside JC Penney’s locations.

The companies are competing with mass-market retailers such as Amazon, Walmart and Target, companies that are grabbing a larger share of the growing cosmetics market. Amazon’s total beauty product sales increased 30 percent to $900 million between the first quarter of 2017 and 2018, according to One Click Retail.

Though consumers are increasingly buying beauty products online -- e-commerce sales increased by $1.6 billion in 2017 over the previous year, while brick-and-mortar sales decreased by $168 million, according to Statista -- e-commerce still accounts for a small percentage of revenue for retailers. Online sales at Ulta Beauty in its fiscal 2018 first quarter rose 48 percent. That still constituted just 10 percent of total sales, which is typical for the retail industry.

Ulta and Sephora are targeting younger consumers in particular, said Hillary Steinberg, an adviser with real estate services firm MDL Group in Las Vegas who specializes in retail office and leasing. Her three daughters typically research products online and "then go into a Sephora or Ulta to buy them," she said, adding that the in-store experience must be experiental and entertaining.

Sephora in particular has been lauded for its in-store technology, offering facial scanning for color matching, sensory technology for fragrance testing and in-store and in-app augmented reality, according to a report by research firm CB Insights.

Ulta Beauty, based in Bolingbrook, Illinois, plans $375 million in capital expenditures this year and just began operating its new, 670,000-square-foot distribution center in Fresno, California, at full capacity to serve West Coast customers.

That will help the company "achieve our goal of delivering orders in three days or less for more than 95 percent of our e-commerce sales by year-end," Chief Executive Mary Dillon said in a May conference call.

Ulta Beauty, which reports its second-quarter earnings Aug. 30, opened 34 brick-and-mortar stores in its fiscal first quarter for a total of 1,007 outlets. Sephora, which is based in Paris and maintains its U.S. headquarters in San Francisco, operates 430 freestanding stores in the U.S. and another 590 inside JC Penney stores in a smaller footprint.

Ironically, Sephora’s fulfillment center under construction in Las Vegas is adjacent to one under construction by Amazon.

"This is a real fight," Steinberg said. "The demographic is strong, and the products have good markup and profit."

Smaller Beach Cities From Coast to Coast Ride a Development Surge

AUGUST 20, 2018

By Linda Moss, Paul Owers and Jacquelyn Ryan

Vacation Towns Awash in Spillover Tourists From Major Resorts Now Reel in Investors

The 12-room luxury hotel known as Vespera on Ocean (pictured) in Central California’s Pismo Beach is one of a number of beach resorts being built in smaller coastal communities across the U.S. as visitors seek more affordable getaways. Image courtesy of Nexus Development.

It has been ages since hotels have been built in Pismo Beach on California’s Central Coast. The sleepy beach town about an hour north of Santa Barbara looks like a nostalgic postcard, with coastal roads lined with aging mom-and-pop shops as surfboard-toting families stroll the breezy promenade. It's also ground zero in a little-noticed nationwide development boom.

In the past year, a new luxury hotel opened and another broke ground as existing hotels undergo renovations into high-end boutiques. Hotel occupancy is climbing and hoteliers are raising rates as more visitors pour in from inland as well as the northern and southern coasts.

"When I saw how well that market did, my jaw dropped," said Cara Leonard, senior vice president of real estate brokerage CBRE Group Inc.’s hotels division in Los Angeles.

That’s also the case with once less-popular beach markets from the West Coast to Fort Lauderdale in Florida and Asbury Park in New Jersey. As prime beach resort markets like Santa Monica and Miami hit peak pricing in a surging economy, spillover markets are booming with unprecedented numbers of visitors looking for more affordable getaways. It’s leading to renewed investment and development in these cities.

Top hotels in prime beach cities have soaring prices, topping $700 a night in some cases, as they record historically high occupancies.

"For the average person, you can’t afford to stay in Santa Monica or Laguna Beach" in California, Leonard said. "They are looking for other beach-front locations where you don’t have to spend $1,400 to have a weekend on the beach."

The beachside hotel rooms in Los Angeles, for example, grew to 85.5 occupancy with average daily rate of $311 for the first six months of this year, the city reported. Meanwhile, a three-hour drive north on the coast, Pismo Beach hotels had an average daily rate of $169, a 5 percent increase over the previous year but still a significant discount to Los Angeles, according to city figures.

The affordable rates aren’t the only attractive component of the quieter markets either.

"There are a lot of guests that don’t want to deal with Miami and the traffic there," said John Wijtenburg, vice president of Colliers International’s hotel group.

The growing demand has hoteliers looking to build in the areas they once overlooked. There’s notable resort development all along the U.S. West and East Coasts as demand grows. A Four Seasons hotel is under construction in Fort Lauderdale while a Marriott Autograph Collection hotel is underway in Pismo Beach.

Brian Cheripka, senior vice president of real estate investor iStar, which is developing a boutique hotel and condo complex in Asbury Park, said "we’ve seen a resurgence of people coming to the beach ...people coming back to this community, but we really saw a lack of places to stay."

Of course, this growth phenomenon is driven by a strong economy, so there’s no guarantee the boom will last. In the last recession, small towns relying on discretionary income like tourism took a disproportionately large economic hit because they lack business diversity. Even so, tourism officials hope the added development will lessen that blow by letting the towns bounce back from the eventual economic downturn.

A Renaissance Market

While Pismo Beach in San Luis Obispo County hasn’t seen the kind of improvements and development popular beaches in Northern and Southern California have experienced in this latest upswing of economic growth. that’s starting to change.

Sandy Wirick, director of sales for Martin Resorts that owns a number of hotels in Pismo Beach and across the Central Coast, said her company saw a strengthening hospitality market and decided to reinvest in some of its older Pismo Beach properties that had been previously flagged by national hotel chain Best Western.

She said because of the demand, her company could increase its daily rates and reinvest in two of its hotels - the Inn at the Cove and the Shore Cliff Hotel - to turn them into boutique high-end properties.

"The area has been seeing a renaissance as far as the quality of lodging," she said.

Outside investors are building new hotels on the coastline of Pismo Beach for the first time in years.

Last year, developer Somera Capital Management and hotel management Pacifica Hotels opened $40 million luxury hotel called Inn at the Pier where a former parking lot once stood. The hotel added 104 rooms to the market and opened the area’s first top-tier luxury brand.

Now, developer Nexus Development Corp., is underway on the construction of the second new hotel in Pismo Beach in years. Known as the Vespera on Ocean, the project will add 128 rooms and a pool on the coast. The hotel is part of Marriott International’s Autograph Collection, which bring independently owned hotels under the Marriott umbrella.

Cory Adler, president of Nexus, said the acre and a half of land on the ocean was too compelling to turn down.

"It’s hard to find an opportunity," he said. "Pismo is truly one of the last California beach towns. The downtown is a cool sleepy California beach town and it could still use some improvements to come in. But the market has been good."

Pismo officials are encouraging the tourism. The city has a million dollar ad campaign budget and is modernizing much of the downtown. It just completed an $8.5 million renovation of the pier as well as updates to its public promenades and public parking.

In all, the hotel market’s revenue per available room, a key hotel indicator that is a multiple of a hotel's average daily room rate and its occupancy rate, is up 6.6 percent to $114.43 for the first six months of this year over last year, according to city figures.

"We are on a pretty good start here," said Gordon Jackson, executive director of Pismo Beach’s Convention and Visitors Bureau. "We are looking again to do even better next year."

The city’s transit occupancy tax, which is 10 percent charge to a visitor at a hotel, garnered more than $10 million from July of last year to June of this year, Jackson said.

While that’s been a boon for the city, for visitors it’s still a steal compared to larger markets.

"In L.A. that (transit occupancy tax) fee is 17 percent, not to mention the resort fee and $40 a night to park," he said. "When you get up here, they have free parking and the resort fee is nominal. And you might get a free bike rental too."

There was a short time you could get cheap rooms in luxury beachside hotels in major cities during the downturn but now they are holding their rates, according to Leonard. "They cannot lower their rate or it goes completely upside down for them," she said, noting that luxury hotels pay hefty staff salaries to accommodate visitors. "Having that person on-site is going to cost me more than that $160 a night. They are better off not renting it at a higher price than they are renting it at a lower price."

She said even when Los Angeles’ beachside hotels were suffering during the recent economic downturn, they weren’t lowering rates to rock-bottom prices. In cities like Las Vegas, hoteliers expect to offset the loss on a low nightly rate with money visitors spend in the attached casinos. There’s not an equivalent money-maker for beach resorts.

Building Boom

In South Florida, plenty of visitors want to steer clear of Miami, and that’s creating a steady demand for smaller area markets such as Fort Lauderdale and Hollywood in neighboring Broward County, said Wijtenburg.

"These markets have shown that they can create their own demand," Wijtenburg said. "They’re not relying on the primary market to fill rooms as they were in the previous cycle."

Figures from the Greater Fort Lauderdale Convention & Visitors Bureau show hotel occupancy in June was 75.9 percent, the highest in any June since 2010. Revenue per available room was $92.13, the highest of any June in the past three years, the tourism agency said.

"I should knock wood before I say this, but it’s been a great first half of the year," said Stacy Ritter, the group's president.

Upscale resort properties such as the Conrad Fort Lauderdale Beach and the Ritz-Carlton Fort Lauderdale are consistently busy, according to Ritter.

The Four Seasons started construction earlier this year on a hotel and condominium at 505 N. Fort Lauderdale Beach Blvd.

"We’ve seen a lot of developers that have never built in Fort Lauderdale move north (from Miami)," Ritter added. "The real estate is less expensive."

In Hollywood - south of Fort Lauderdale - the 349-room Margaritaville Hollywood Beach Resort opened in 2015. The property, with a theme based on singer Jimmy Buffett, has restaurants, bars, shops and a spa.

Denver-based KSL Capital Partners bought the resort for $190 million, or more than $544,000 a room, from Starwood Capital Group and The Lojeta Group in April, according to CoStar data. At the time, Hollywood Mayor Josh Levy told CoStar News the project succeeded in improving the beach and bringing in out-of-town visitors to the city.

Colliers’ Wijtenburg said Margaritaville and other properties offering a lifestyle are doing well.

"Guests want something that they can’t experience at home," he said.

Northeast Demand

The same is true for markets even further north.

While gambling mecca Atlantic City has grabbed the headlines in terms of hotel openings at the Jersey Shore this summer, smaller and less flashy venues on the state’s beachfront have new hospitality development as well. Real estate firms are bringing the kind of hotels - in terms of design, restaurants, and amenities - that can be found in hip city neighborhoods to the Garden State’s beaches, which now have an abundance of older, family-oriented hospitality resorts, tiki bars included.

Asbury Park, enjoying an economic revival that’s capitalizing on the seaside city’s history as a music and arts mecca, next year will welcome the Asbury Ocean Club, Surfside Resort and Residences, right off the boardwalk. Real estate investor iStar is the developer finishing up construction on the 17-story, 500,000-square-foot tower that will include a 54-room boutique hotel, 22,000-square-feet of ground-floor retail and 130 luxury condominiums.

The New York City-based developer purchased 35 acres in the city and is spending more than $300 million on projects, with a significant amount of that capital going toward the Asbury Ocean Club, said iStar's Cheripka. The company has another hotel in the city, a former Salvation Army building that it renovated and opened in 2016 as the 110-room The Asbury.

Asbury Park -- home to the Stone Pony, a venue that New Jersey native Bruce Springsteen made famous and still plays -- is now attracting not only local day-trippers but tourists from around the country and the world, according to Cheripka.

The Ocean Club’s Hotel, with its urban-boutique vibe, will be operated by David Bowd - whose resume includes overseeing the management of Chateau Marmont in Hollywood and the Mercer in New York. Dowd is also a partner in and operator of The Asbury.

In Long Branch, NJ, Kushner Cos., the real estate firm founded by the family of Jared Kushner, President Donald Trump’s adviser and son-in-law, is adding a hotel to its Pier Village mixed-use development. The firm describes the Pier Village Hotel as a property "that will satisfy the area’s shortage of luxury lodging options."

Farther south "down the shore," as New Jersey natives say, in Stone Harbor, the Reeds at Shelter Haven, a 37-room luxury boutique hotel, is expanding to accommodate more year-round business. It is constructing a building, Spa Side, that will house 22 more guest rooms and a two-story luxury spa, Salt Spa.

Owned by Refined Hospitality, Reeds’s new hotel accommodations are slated to open this fall or winter, with the spa set to debut in winter 2019. The expansion comes in response to feedback from guests over the past five years and aims to encourage guests to come outside of the summertime, according to Managing Director Ron Gorodesky.

"The demand for accommodations at The Reeds has made it necessary to expand our footprint," he said in a statement. "Specifically, our meetings and wedding business is booming and we wanted to be able to accommodate more of these guests under our own roof while providing them with luxury spa and fitness services. We are committed to providing more year-around amenities for our guests and local residents to enjoy."

On Long Beach Island, Exit 63 of the Garden State Parkway, Chris Vernon is in the process of building a 105-room hotel at the former site of The Stateroom, a location at the island’s entrance at the foot of the Route 72 ramp in Ship Bottom, NJ. Hotel LBI, scheduled to open in 2020, will have views of the island’s bay and the ocean from its rooftop deck.

Hotel LBI and the Reeds at Shelter Haven - one with its large banquet facilities and the other with a fancy spa -- appear to be addressing the issue that hospitality facilities at the Jersey Shore have always faced, namely attracting business in the off-season. That challenge has kept some of the national chains, like Marriott, away, said Marilou Halvorsen, president of the New Jersey Restaurant & Hospitality Association.

"The problem has always been that it’s so seasonal - It’s hard to get year-round business," she said. "And if you’re not open year-round, you can’t hire year-round employment so it becomes challenging ... So you either have to have a real small hotel or you kind of have to be a destination."

Many of New Jersey's shore towns are packed with houses that visitors rent from their owners during the summer, rather than go to a hotel. And like the rest of the Garden State, there is little vacant land left for hoteliers to build on at the coast.

"A lot of it (the shorefront) is already existing properties, especially in our area, where you have so much residential," said Lori Pepenella, chief executive of the Southern Ocean County Chamber of Commerce, which includes Long Beach Island. "Even when hotels went up for sale in the past, they were turned into condominiums, and that has been the trend. And now we’re starting to see reinvestment in hotels. The Drifting Sands (in Ship Bottom) was just purchased last year. There’s been discussion that there’s other hotels that might be renovated or bought out, but those haven’t actually finalized."

Open Office Spaces Must Evolve to Compete in a WeWork World, Experts Say

AUGUST 16, 2018

Projects like the new Ampersand, in San Diego’s Mission Valley, seek to offer office configurations and amenities to compete with providers such as WeWork. Credit: Casey Brown Co.

The long-hailed concept of “open” office plans is getting pushback amid complaints about a lack of privacy and unwanted workplace interruptions, prompting developers and designers to scramble to figure out how to provide the latest corporate perk: Alone time.

The concerns about too many workplace disruptions are circulating in corporate and academic circles as developers try to compete with a growing nationwide onslaught of non-traditional space providers such as WeWork that are serving tenants demanding flexibility well outside the hours of 9 to 5.

For landlords trying to land tenants seeking top office space to lure the best job prospects, getting things right often means navigating differences in office cultures, many of which require more flexible, multiple-use space configurations among other elements. The answer can be as simple as providing a mix of open and private areas to fit multiple situations during the workday, according to experts at a recent San Diego forum presented by the local chapter of the Washington, D.C.-based Urban Land Institute.

Tiffany English, principal in the San Diego office of design firm Ware Malcomb, said offices are increasingly taking on hybrid setups, providing areas where teams can come together and other spaces designed for an increasing need for alone time during the workday. The exact mix is determined by factors including work schedules and the types of tasks being done.

“Not every culture is a creative, open office culture,” English said. “We can’t apply that principle to every single budget.”

Some offices have a mix of different work responsibilities and personality types, which also factor into configuration planning.

"Not all engineers are social people,” said Pamela Fleming, human resources director for Irvine-based Fuscoe Engineering, a construction engineering firm, noting that offices can have multiple people who don’t require or desire constant interaction with supervisors or co-workers.

"If you’re going to cram all your introverts and extroverts into a wide-open space, good luck with that,” said Anne Benge, chief executive of Cultura, a San Diego-based workspace consulting and design firm.

Jeffrey Barr, principal in the locally based Schmidt Design Group, said some office building operators are seeing resistance to the concept of open floor plans, which gained in popularity in the past decade, upending cubicle-centric planning in many industries.

Recent feedback and research indicate the open concept needs more tweaking. For instance, research by Harvard Business School professor Ethan Bernstein, published last month in the British scholarly journal Philosophical Transactions of the Royal Society, suggests open office spaces can have unintended negative effects on workers.

With co-author Stephen Turban, Bernstein found that workers will often put on headphones to drown out distractions, and will frequently feel pressure to look busy in front of supervisors and co-workers. Researchers concluded that efforts made to appear focused on work actually can reduce interaction with other workers -- the exact opposite of what open offices were intended to encourage.

Longtime San Diego developer Casey Brown, founder of Casey Brown Co., said his company has recently been experimenting with a mix of onsite amenities and services at its local office properties, including hosting worker breakfasts in lobbies and providing other spaces where tenants provide their own communal meals.

These are in addition to the fitness centers, outdoor meeting spaces and recreational areas that have become necessary in order to compete for office tenants.

Brown’s projects include the nearly completed Ampersand, a creative office complex consisting of renovated buildings in Mission Valley that formerly housed operations of the San Diego Union-Tribune newspaper. Brown said his firm is in talks with multiple potential tenants, many of whom are still grappling with how to weigh the costs and benefits of moving into the newer creative spaces now being offered in several San Diego County locales.

Since many offices are now used well beyond the traditional eight-hour workday, developers face a more complex calculus as they attempt to present users with per-hour costs for utilities and other expenses, as well as the time and money they’re saving from food services and other on-site amenities.

“It’s our job to quantify that,” Brown said, adding many tenants remain unsure of what they want in a new space.

In commercial real estate terms, getting the configuration and amenity mix right has implications for the bottom line. A 2017 global report by brokerage firm Cushman & Wakefield noted that office property owners increasingly are tending to matters of employee well-being when planning new projects and competitive renovations. This includes acoustics, air quality, and the variety of workspace setups within offices.

From an investment standpoint, a survey included in the Cushman report found nearly 40 percent of respondents who reported increased property values from instituting improvements related to well-being said that rise was at least 7 percent. Nearly a third of respondents -- 28 percent -- said they were able to charge premium rents for their spaces, and 46 percent said their spaces leased more quickly.

Some worker and tenant retention matters can’t be addressed through configurations or amenities. ULI panelist Benge said workplaces can take simple steps to boost office culture and morale, like making sure multiple people have a regular say in ordering office meals and snacks, and where those items come from.

A bigger challenge facing corporate leaders is how to reconcile the need for productivity with the priority of workers, especially millennials, to have more balance and control of their lives outside the office. This can be a matter of establishing supervised programs like paid time off, or work-from-home hours, but many employers are still struggling to implement such efforts, the experts agreed.

"When you start looking at that, it’s a really interesting, mind-bending thing to think that people want to be there because they love what they do, and it’s not about you chaining them in, saying you can't take time off because I’m not going to have enough productivity,” Benge said. “And I think that’s a massive, massive shift of engagement, in how people work.”

AUGUST 10, 2018

Amazon’s Mere Presence in its Second Headquarters City Could Lead to an Entire Tech Eco-System

To measure Amazon’s impact on whatever city it selects for its second headquarters location, don't think buildings. Think people.

The draw of so many tech-savvy workers to one area can be an irresistible lure to other corporations that depend on such talent. At least 31 Fortune 500 companies now have some presence in Amazon’s home city of Seattle, up from seven in 2010, when the company moved its headquarters downtown.

In Seattle, Google is building a 600,000-square-foot, four-building campus across the street from Amazon’s headquarters. Facebook now has 1 million square feet of office space in Seattle, according to CoStar data, and Apple is gobbling up space in a downtown skyscraper nearly as fast as it comes on the market.

Expect a similar scenario to play out in HQ2, as companies will increasingly jockey for office space near Amazon. It’s all about luring top talent to areas the Brookings Institute calls "innovation districts," or tech-centric areas with anchor institutions that attract similar companies because of their proximity to top talent. Brookings cited Seattle’s South Lake Union neighborhood-- where Amazon maintains its headquarters -- as one of the country’s top such districts because of its mix of research institutions, technology companies and startups.

That "ripple effect" could transform Amazon’s HQ2 city as much as anything the company does directly, said Jon Scholes, chief executive and president of the Downtown Seattle Association.

Besides Google, Facebook and Apple, companies such as Twitter, Airbnb, Oracle and Best Buy are just a handful of businesses that opened satellite offices in Seattle largely because of Amazon.

"Any city that wants to be competitive needs to embrace what Amazon did for Seattle. They created a blueprint for economic development in the 21st century," said Scholes, who added that the company will "absolutely strengthen the tech eco-system" in whatever city it chooses to locate its second headquarters.

Amazon, the world’s biggest retailer, has said it would choose a region from among 20 finalists this year for its second headquarters in a project it estimates will generate 50,000 jobs and $5 billion in capital spending. The company has said its second headquarters will be a full equal of its Seattle footprint. It occupies 13.6 million square feet of office and industrial space in 45 buildings in the Seattle area, according to a report by San Francisco-based BuildZoom.

While the second headquarters is likely to have an outsized effect on smaller cities such as Columbus or Raleigh, NC, the report said Amazon could still have a "disproportional effect" on real estate markets in larger cities -- think New York or Chicago-- if it concentrates its offices in a small area, as it did in Seattle. The company both leases and owns its office buildings -- it occupies 20 percent of all office space in its South Lake Union neighborhood, according to CoStar data -- but will initially have to lease in its new city, reducing vacancies and driving up rents, BuildZoom said.

That’s exactly what happened in Seattle. At an average of $52.45 per square foot, commercial rents in Amazon’s South Lake Union neighborhood are the highest in the Puget Sound region, according to CoStar data. The influx of so many workers can strain the transportation system and send rent and housing prices skyrocketing. Kiplinger says the cost of living in Seattle is 49 percent above the U.S. average, and Case Shiller says housing prices rose 13 percent the past year.

Amazon may also spark a fierce war for tech talent and aggressively come after other companies’ star workers, said Ami Sarnowski, chief innovation officer at technology services firm Global 10. She estimates that Amazon will poach anywhere from 3 percent to 7 percent of top talent in its HQ2 city.

That can quickly escalate as more and more tech companies move to town.

Amazon hired 504 employees from Microsoft between 2001 and 2016, according to data from the career site Paysa, while Apple today is in the midst of a campaign in Seattle to recruit employees from Amazon and other tech companies. When Oracle opened its Seattle technology center it hired two former Amazon executives to run it.

Seattle has become a top destination for out-of-state tech workers to move, according to professional networking site LinkedIn, and Amazon’s HQ2 city should expect a similar influx of tech talent. Like in Seattle, that’s likely to drive development of high-end multifamily buildings near the company’s campus. Amazon says 20 percent of its workers live in the same ZIP code as their offices. The company’s request for proposal emphasized the need for housing near the proposed sites, which could create new opportunities for multifamily developers and investors.

While Amazon has been tight-lipped about the makeup of HQ2, it did say that the average wage of employees there would be more than $100,000 annually.

Suzanne Dale Estey, former CEO of the Economic Development Commission of Seattle & King County, urges Amazon’s HQ2 city to not underestimate a once-in-a-lifetime chance to plan for extreme growth.

"This is your opportunity to plan for a 10-, 20-, or 50-year horizon in infrastructure, affordability and civic fabric," Dale Estey said. "It will completely change that city forever."

Mall Operators Turning to Retail Incubators to Fill Empty Space

AUGUST 08, 2018

This is Not a Trend, Says One Leasing Expert. It’s a Sign of Things to Come.

Mall operators are taking a page from the playbook of their office counterparts and setting up retail incubators in some of the space left vacant by departed department and apparel store retailers.

Offering retail and technology startups a shared space to test their concepts before live shoppers, the new retail incubators also provide mall operators with an opportunity to find tenants with the potential for growth - and a diverse variety of new retailers giving shoppers a new reason to visit the mall.

This November, several small, startup retail and e-commerce companies plan to occupy 11,000 square feet of vacant space in a retail incubation space at New Jersey’s Cherry Hill Mall near anchor tenant Nordstrom.

Earlier this year, a 15,000-square-foot innovation center known as Cowork at the Mall opened in a former Sports Authority store at Chicago’s Water Tower Place.

And Simon Property Group, the nation’s largest mall operator, is in the early stages of developing a retail incubation program for a number of its properties.

Beyond just space, incubators offer fledgling new retailers access to experienced operators, coaching and networking opportunities to help them get their companies off the ground.

"This is not a [passing] trend," he said. "It’s a sign of things to come. If you’re a mall owner right now and you’ve got some unique, vacant spaces, you’ve just got to get creative."

Cherry Hill Mall owner Pennsylvania Real Estate Investment Trust teamed with Washington, DC-based incubator network 1776, which runs small business incubators in 10 cities across the Northeast, to develop the space at that mall.

Notably, the new incubator space will be PREIT’s first venture into startup incubation, and 1776’s first location in a mall.

"The Cherry Hill Mall location allows us to be more creative with our incubator as retail evolves and the face of work shifts," said Jennifer Maher, chief executive of 1776, in a statement announcing the agreement with PREIT.

The incubator will include showroom space where members can demo their products before establishing pop-up shops in the mall, said Heather Crowell, PREIT’s senior vice president of strategy and communications.

"It’s critical to stay relevant and creatively use space with innovative concepts," Crowell said. "We would love to be part of the discovery of the next great retail product."

Retail incubators have popped up across the U.S. the past several years. Target, Walmart and Ikea all have internal incubation programs, and other companies have created standalone retail incubator space.

Coworking, demo and event space provider BeSpoke has been operating an incubation center in Westfield San Francisco Centre for three years. It reports it attracted more than 100,000 visitors the first year, on its website.

Macerich Co., the third-largest U.S. real estate investment trust operator, just announced a partnership with Industrious, a company that operates co-working locations in almost 50 cities, to open co-working spaces at several of its malls across the country. The first is slated to open in January 2019 at Scottsdale Fashion Square in Arizona.

Many mall operators, though, are scrambling for unique ways to fill space, Mackenzie Retail's Fidler, Jr. said. His company is increasingly on the lookout for startup retailers, and he often scours local farmers’ markets and social media sites in search of potential tenants for his clients.

"We’re looking for anything to backfill space," he said.

Editor's Note: This story has been updated since it was originally published to include mention of Macerich today announcing plans to add coworking to some of its malls.

JULY 20, 2018

Blackstone Group paid $1.64 billion in April for a trio of resort properties, including the Grand Wailea on the south Maui island of Hawaii (pictured).

Large hotel deals pushed U.S. lodging and hospitality sales ahead of all other major property types in the first half of the year, with Blackstone Group and other private-equity buyers paying top dollar for luxury and resort properties.

Hospitality investment sales surged 25 percent in the second quarter and 30 percent for the first half of 2018 from a year earlier, according to the latest CoStar data. The $18.1 billion in total first-half hospitality transactions matches the $18.1 billion for the first half of 2016 but falls short of the almost $27 billion in that portion of 2015, the height of the hotel consolidation spree.

"Hotel fundamentals are still really strong," said Jeff Myers, managing consultant and lodging specialist for CoStar Portfolio Strategy. "Many markets across the country have occupancies at or near record-high levels." Hotel demand surged as U.S. sales of offices slid 17 percent, retail fell 18 percent and mixed-use properties declined 29 percent in the first half from a year earlier, according to recent CoStar data.

"Big-ticket hotel deals have closed with a little more regularity this year, contributing positively to volume," Myers added.

Portfolio sales, which typically drive hospitality investment, accounted for the largest deals in the first six months, topped by Blackstone Group's $1.64 billion purchase in April of a trio of resort properties from Singapore-based GIC Real Estate. The portfolio included the Grand Wailea on the south Maui island of Hawaii; the La Quinta Resort & Golf in La Quinta, CA; and the Arizona Biltmore Resort & Spa in Phoenix.

A Hong Kong investor bought a portfolio of seven properties in six states from Baring Real Estate Advisors for $650 million in a deal that closed at the end of January. The $1.2 billion bankruptcy sale of the 35-property John Q. Hammons Hotels & Resorts chain also accounted for a sizeable share of sales in the first half.

Real estate investment trusts had a slice of the action in the first six months. Host Hotels & Resorts bought the Grand Hyatt San Francisco; the Hyatt Regency Coconut Point in Bonita Springs, FL; and the Andaz Maui at Wailea on Maui from Hyatt Hotels Corp. for a combined $1 billion on March 29.

Hospitality deals made up at least a quarter of spending from private equity sources such as Blackstone as of the first quarter, according to CoStar data.

Debt funds are emerging as a major source of financing purchases of U.S. hotels, which are traditionally financed by banks and securitized loans, according to Kevin Davis, managing director for Jones Lang LaSalle's New York hotels and hospitality team.

"Over the course of 2018, hospitality debt markets have been exceptionally strong, which is a trend we expect to continue," Davis said.

The largest single-property lodging sale of the year to date is for the Marriott Edition in Manhattan, a hotel on Times Square at 701 Seventh Avenue that hasn't opened yet. Maefield Development and Fortress Investment Group bought out its partners in the 39-story hotel-and-retail property scheduled to open this year, including The Witkoff Group, Ian Schrager, New Valley and Winthrop Realty Trust, for $1.53 billion.

Three markets logged more than $1 billion in sales in the first half, led by New York City at $2.1 billion, compared with just $367 million in the first half of 2017, according to CoStar data.

Sales increased 60 percent from a year earlier in Washington, D.C./Northern Virginia/Maryland to about $1.1 billion, and jumped to just more than $1 billion from $237.8 million in Phoenix.

JUNE 25, 2018

By Mark Heschmeyer

Blackstone To Team with Greystar To Own a Portfolio of Off-Campus Student Housing

Pictured: EdR's GrandMarc at Westberry Place, a 244-unit student apartment built in 2007.

Education Realty Trust, one of the nation's largest developers, owners and managers of collegiate housing communities, agreed to be acquired an affiliate of Greystar Real Estate Partners, in an all-cash transaction valued at $4.6 billion, including debt to be assumed or refinanced.

In conjunction with the deal, a joint venture between an affiliate of Blackstone Real Estate Income Trust Inc. and an affiliate of Greystar would acquire a portfolio of off-campus student housing communities located adjacent to top-tier university campuses.

Under the terms of the merger agreement, which was unanimously approved by EdR's board of directors, EdR's stockholders would receive $41.50 per share in cash.

"It’s no secret that as a company, EdR is a true leader in our space. We have been, are and will continue to be a strong company, with an unparalleled reputation in student housing. And honestly, that’s why we were approached with this offer," Randy Churchey, EdR's chief executive and chairman, said in a statement to be delivered to EdR employees Monday morning.

"I realize that many of you saw the Wall Street Journal article not too long ago speculating that something like this could happen, so it may not be a complete shock to you, but allow me to reassure you: this is a great move for EdR. It will allow us to be even more competitive in the student housing space, and potentially compete in deals around the world that we haven’t been able to before."

EdR said there is a 30-day process for other companies to make a competing offer. Once that period is up, and if no compelling offer is accepted, then EdR would move forward with Greystar.

"This deal was attractive to us for so many reasons, but of course a financial reason was a driving factor," Bill Brewer, chief financial officer, said in a statement. "As a public company we have a responsibility to our stockholders to ensure they get the maximum return. You’ve heard us say many times that our stock was trading at a significant discount, so it was a great value. As recently as late April, our stock was trading below $32 per share. In comparison, Greystar is paying $41.50 per share, which represents a nearly 30% premium for our stockholders."

The newly combined Greystar/EdR team would continue to manage the assets.

The transaction is currently slated to close in the second half of 2018. It is subject to customary closing conditions, including the approval of EdR's stockholders, who will vote on the transaction at a special meeting on a date to be announced.

JPMorgan Chase Bank, N.A. has provided a commitment letter to Greystar's newly formed fund for debt financing for the transaction upon the terms and conditions set forth in such letter.

As a result of Monday's announcement, EdR said it does not expect to issue a second quarter earnings release or host a conference call to discuss its financial results for the quarter ended June 30, 2018.

Greystar is the largest operator of apartments in the United States, managing over 435,000 units in over 150 markets globally, with an aggregate estimated value of approximately $80 billion.

Earlier this month, Greystar Real Estate Partners and the Public Sector Pension Investment Board, one of Canada’s largest pension investment managers, and global asset manager Allianz Real Estate, formed a joint venture to grow Chapter, London’s leading student accommodation brand.

The new partnership supports an expansion program targeting 10,000 student beds and doubling the size of the portfolio within five years.

White House Backs Privatizing Fannie, Freddie as Part of Sweeping Government Reorganization Proposals

JUNE 22, 2018

In an unexpected move yesterday, the White House released a wide-ranging set of recommendations for reorganizing several federal agencies. The 132-page report covers government-wide reorganization proposals that could have major impacts on the real estate industry as the report stakes out the administration's positions calling for more private sector involvement in managing the government's real estate.

Among other things, the report calls for the federal government to do a better job of managing its real estate assets and adjusting its property portfolio.

Among the many proposals included in the report are moving more federal agencies and jobs outside of the Washington, DC, area, establishing a new fund to pay for property improvements, giving federal agencies better incentives to sell unnecessary assets, and establishing smarter leasing practices.

However, the portion of the report garnering the most attention in real estate circles is its position in favor of privatizing housing finance government-sponsored enterprises Fannie Mae and Freddie Mac by ending the government's conservatorship and reducing their role in the housing market, while providing an explicit but limited federal backstop in the event of a market crash.

While housing finance reform has many supporters, the privatization of Fannie and Freddie has its backers and opponents.

David H. Stevens, president and chief executive office of the Mortgage Bankers Association (MBA) issued the following statement regarding the proposal.

"MBA applauds the administration for releasing a proposal to reform Fannie Mae and Freddie Mac which closely tracks much of the work that has been done to date by policymakers on Capitol Hill. It includes many core principles that MBA has long advocated for, such as an explicit government guarantee on MBS only as a catastrophic backstop, allowing for multiple guarantors and ensuring small lender access."

Stevens also noted in the statement that, as with any proposal of this size, the devil is in the details, but said the MBA is eager to work with Congress and government officials "to finally tackle this long overdue issue."

Scott Olson, executive director of the Community Home Lenders Association, released the following statement.

"CHLA applauds the administration for its call to end the conservatorship of Fannie Mae and Freddie Mac and to recapitalize and re-privatize them with an explicit government guarantee."

However, CHLA said it continues to have significant concerns about adding GSE guarantors beyond the restructured versions of Fannie Mae and Freddie Mac. Most privatization proposals up until now have called for allowing private firms to set up additional operations similar to the two GSEs.

The CHLA is worried that would allow Wall Street investment banks to use their secondary market abilities to gain an advantage in the primary market and or could turn some of the CHLA’s mortgage banker members into mere loan correspondents.

Earlier this year, the Department of Housing and Urban Development released summaries from a collection of studies it has made on privatizing Fannie Mae and Freddie Mac. One study concludes that political consensus on privatization is essential, and that in its absence, legislation would better be directed to providing a framework through which privatization could be accomplished in the future.

Another study found that some types of loan interest rates could increase without the implicit federal backing of GSE securities, while still another found the GSEs current enjoy a lower cost on their issuance of securities because of state and local tax exemptions. Those costs could increase after privatization and be passed on to consumers.

Repealing the GSEs' federal charters would further lower homeownership levels by pushing up single-family mortgage costs, another of the reports found, while only slightly affect the availability of multifamily housing financing.

Meanwhile, the social costs of privatization would fall disproportionately on African Americans, lower income households, and those living in central cities. The researchers conclude that, as GSEs, Fannie Mae and Freddie Mac are well-structured and efficient providers of targeted social benefits.

Seeks to Give Agencies More Flexibility

As for the numerous other real estate-related changes included in the report, the White House said it wants to allow federal agencies to sell their own unneeded property directly to buyers without first offering to other government agencies, as currently required, and allow the agencies to retain net proceeds of property sales for use without further appropriation as a financial incentive to spur property sales.

The report claims that federal agencies currently incur substantial cost and effort to dispose of excess properties, with little to no financial upside for them, reducing their incentive to go through the property disposition process.

The White House is also proposing to create a new funding mechanism for large, civilian real property projects. The proposal would establish a mandatory revolving fund for the construction or renovation of federally owned civilian real property, thus allowing agencies to budget for improvements and acquiring major assets.

The lack of such a fund has hindered the General Services Administration in financing needed renovations at existing buildings and major new construction projects, such as the replacement of the Federal Bureau of Investigation Headquarters facility in Washington, DC.

The White House also said it believes there are many lessons the government can draw from the private sector on how to apply information technology and management practices on operating its properties.

To address those issues, the White House report said the GSA would be undertaking two policy changes. First, it will move to execute longer, non-cancelable lease terms to secure lower rates. Second, it will undertake "more rigorous cost analysis" on where to house its agencies and on how much space they need.

Building owners and investors across the country - especially those on the West Coast and Eastern Seaboard - are bracing to find out how AT&T’s acquisition of Time Warner will impact their real estate markets.

The $85 billion deal was given the greenlight by a federal judge yesterday and is now expected to close within weeks. The effect of such a massive merger is expected to be huge. Across markets, people are asking the same two questions: Will the combination result in consolidation of redundant space, or will it trigger new, bigger space requirements?

As with most corporate mergers of this size, the answer may lie somewhere in the middle.

Now that AT&T's acquisition of Time Warner can go through it may clear out the logjam of real estate deals that had been on hold while the companies awaited for the court's decision. But it also may bring pain for the landlords and companies that could be causalities of rightsizing and streamlining by the companies as they join together.

In Los Angles, the merger could make an AT&T-Time Warner conglomerate one of the largest private office tenants in the market with millions of square feet and thousands of employees across the county.

Its LA real estate holdings would range from AT&T’s DirecTV, which occupies roughly half a million square feet in El Segundo, to Time Warner’s Warner Brothers studio, which owns its 62-acre lot in Burbank and occupies about half a million square feet in a nearby Douglas Emmett Inc. office building.

"Today’s announcement is well-received within the real estate community," said Carl Muhlstein, international director at Jones Lang LaSalle Inc. in Los Angeles, and one of the most prolific brokers in the city's media and tech industries. "Uncertainty due to recent M&A and partnership activity prevented material (real estate) transactions."

As an example, Muhlstein cited Time Warner’s premium channel HBO, which had been in negotiations last year to lease a 128,000 square feet in a Culver City building, but the deal ultimately fell through at the last minute because of uncertainty over the merger and the financial future of the parent company. Apple Inc. ended up swooping and taking that lease for its content creation division.

With the merger back on, brokers expect HBO to be back in the market for office space after the deal closes.

In Atlanta, AT&T’s acquisition of Time Warner could be huge. All told, CNN and Time Warner’s various Atlanta-based networks occupy 1.6 million square feet in the downtown and midtown areas alone. Each of the buildings is owner-occupied by Turner Broadcasting System (TBS).

Ted Turner founded TBS and CNN in Atlanta, and though Time Warner has relocated its weekday anchors to New York or Washington and moved much of CNN’s top talent and its chief executive position to New York, thousands of CNN employees are employed in Atlanta. Time Warner owns CNN Center, the company’s high-profile regional hub and studios in the heart of downtown Atlanta. TBS itself employees more than 5,000 in Atlanta.

Several Time Warner networks, originally part of the Turner Broadcasting System, are headquartered in Turner’s Techwood Campus at 10th Street and Techwood Drive in Midtown. Turner developed four buildings at Techwood to host the networks, each has its logo attached atop the buildings.

"I like the chances of keeping a good deal of Time Warner people that are not redundant in the bigger scheme of AT&T," said Jerry Banks, managing director of The Dilweg Cos. who owns an Atlanta building that TBS once anchored. At the same time, Banks acknowledged that "back office and support groups will be at risk here."

Indeed, the merger will inevitably create redundancy in real estate and employees that may lead to significant downsizing or reshuffling.

Last year, AT&T announced it was moving its entertainment group and its few hundred managerial jobs from Atlanta to join its Los Angeles and Dallas offices.

AT&T already is in the process of retrenching and vacating several office towers in Atlanta. By 2020, AT&T will vacate its landmark AT&T Midtown Center and twin towers at Lindbergh, in addition to buildings at Lenox Park. As AT&T works to identify which positions to retain after the acquisition, any redundancy in staff likely will result in job cuts in metro Atlanta, where AT&T employs more than 17,000.

If AT&T decides to relocate the networks or reduce staff, it likely would result in big blocks of space hitting the market, according to brokers. Any moves could especially impact the Midtown office market where developers have started or about to start several new speculative office towers. When the developers planned those projects, they may not have considered AT&T's Techwood Campus buildings could soon be back on the market as multi-tenant rentals.

In Los Angeles, the merger could see some entities, particularly AT&T's entertainment-related groups, spread out across the city reduce, consolidate or move into owned properties. The AT&T entertainment group could further consolidate into any other of the content production entities under the new conglomerate’s umbrella.

And that could have a serious impact across the county.

Consider E! Entertainment. Three years after Comcast acquired NBCUniversal, it moved its networks, including E! and Bravo, from their longtime locations in about 400,000 square feet on the Miracle Mile closer to its Universal Studios lot. Much of that space that it exited four years ago remains vacant today.

Moreover, with news of the future of AT&T’s acquisition, experts expect to see further consolidation on the media industry that will continue to force companies to further consider their real estate options.

"Any consolidation resulting in fewer major studios could put into play both owned-office and real estate properties that would not otherwise be available for sale," reads a note written by Transwestern Executive Vice President Dave Rock and Research Manager Michael Soto in Los Angeles. "In addition, leased-office space, especially in the entertainment-oriented office submarkets of Century City, Beverly Hills, Santa Monica, Culver City, and Burbank, could see long-term office space consolidations that may or may not be backfilled by tech-related entertainment requirements."

The ruling surely figured prominently in today's decision by Comcast, parent company of NBCUniversal, to pull the trigger on an offer to buy a large chunk of 21st Century Fox for approximately $65 billion, setting off a potential bidding war with Walt Disney Co., which is also pursuing the company with a $52 billion all-stock offer.

Observers speculate other media companies, such as CBS, which owns studio lots across Los Angeles, and Viacom, which leases hundreds of thousands of square feet in the city, could be on their way as well.

However, for the most part, investors are optimistic the latest round of corporate mergers is good for the future of the legacy companies. In fact, media takeover-targets have seen their shares shoot up today on speculation that more mergers could be on the horizon, according to Bloomberg. One such mentioned is Lions Gate Entertainment Corp., whose shares have seen the biggest single-day increase in the past five months today.

And legacy media firms aren't the only firms that may be put into play in these entertainment markets.

JUNE 08, 2018

Inspired by Seattle's controversial effort to levy a 'head tax' on its largest employers, the Silicon Valley cities of Cupertino, home to Apple's new spacehip complex, and Mountain View, the location of Alphabet's sprawling Googleplex, are sprinting to qualify similar tax measures on California's Nov. 6 local ballot.

Meanwhile, officials in Sunnyvale and several other nearby cities, are contemplating their own employee tax measures.

The recent moves in California reveal how deeply the Seattle tax measure, which passed last month despite scathing criticism and threats to halt expansion from Amazon.com, has resonated with leaders in tech markets who are struggling to address mounting concerns over traffic congestion, skyrocketing housing costs and other unwelcome byproducts of the extended tech industry boom.

The Mountain View City Council voted unanimously Tuesday to move forward with plans to approve a progressive tax measure that would raise up to $10 million a year by imposing a tax on a half-dozen of the city's largest employers, led by Google, which has 24,000 employees and would be subject to a tax of up to $6.6 million a year. The council is scheduled to take a final vote on the measure June 26 to put the measure before voters in five months.

Neighboring Cupertino commissioned a poll of residents by Voxloca which found that 71 percent of likely city voters in November support progressively increasing the business tax on the city's largest companies. Companies with over 5,000 employees would pay the highest tax, and Cupertino only has one of those, Apple, which at 26,000 employees makes up two-thirds of the employment base. Apple opened its new $5 billion, 13,000-employee Apple Park headquarters last year, and thousands more work at Apple's storied 1 Infinite Loop address and surrounding buildings.

Apple would be levied a $7.4 million annual tax under a scenario outlined by city staff this week, while a sole proprietor with a one-room office would pay about $160. A small store or average-size restaurant occupying a 2,000 square feet of commercial space would be taxed about $220 a year, while a large grocer like Safeway would pay about $1,700.

No Apple representative spoke before the council, however, and Cupertino Chamber of Commerce board member Kevin McClelland said while the chamber supports transportation improvements and he doesn't have an objection in principle to a business tax, he recommended the city proceed carefully and take its time , shooting for the 2020 ballot.

"There seems to be a lot of rush, with a lack of information," McClelland said. "There are thoughtful ways this can be done."

Other council members, including Steven Scharf and former Mayor Barry Chang, said waiting until 2020 would mean missing out on two years of potential revenue to find local solutions to the region's traffic and housing issues.

"We have a major transportation problem," Chang said. "I'd like to see us get it done this year. It will be a disaster if we don't do anything."

The council agreed to consider the measure again at its June 19 meeting and must approve legislation by July 3 to quality for inclusion on the November ballot.

THE PROS AND CONS OF TAXING TECH

Like many large employers, Amazon has long used the power of facility site selection as a bargaining chip in tax issues with states and cities, and its anger over being singled out under the Seattle law has drawn headlines across the country.

However, a handful of cities already have some form of business tax based on employee headcount, including Denver and Pittsburgh. At least so far, Apple, Google and other large companies have not issued statements critical of the efforts in Cupertino and Mountain View.

Tax policy analysts differ on the net effectiveness of taxes targeting large employers. Some experts argue that they indirectly hurt smaller companies that congregate around giant companies, while other analysts maintain a head tax is a reasonable option for local governments struggling to raise revenue to address growth issues associated with the tech firm's rapid growth of the tech firms.

"Clearly these proposals target the tech sector, coming as they do in the hometowns of Alphabet, Apple, and Amazon," said Jared Walczak, senior policy analyst at the Tax Foundation. "But while these taxes may target the 'As,' their impact runs from A to Z."

The impact of a head tax extends far beyond the largest employers, Walczak contends, often hitting low-margin businesses like supermarkets and smaller companies such as suppliers and smaller tech companies wanting to be located near an Amazon or Apple. Those companies could take a big hit if major employers reduce their footprint. "If revenues are tight now, imagine what they could be if employment declines," Walczak said.

While Walczak acknowledges large employers like Amazon and Google can cause added traffic congestion and strain other services, "how a city raises additional revenue matters."

"Whatever you tax, you get less of. Levying a new tax on quite literally employing people is the wrong strategy," he said.

A head tax may be a good option to raise needed revenue given limited local fundraising alternatives, countered Steven M. Rosenthal and Richard C. Auxier, senior fellow and research associate with the Tax Policy Center of the Urban Institute and Brookings Institution.

"We agree that Seattle could design its head tax a little better. But the root question, and one that other cities might watch closely, is: how are fiscally constrained cities supposed to find revenue as their populations and services grow?" Auxier and Rosenthal said in a recent commentary.

They further noted that other U.S. cities, such as Pittsburgh and Denver, have smaller employee tax programs that raise more modest sums from employers.

Pittsburgh’s tax is $52 a year on employees engaging in an occupation within the city while Denver imposes a $117 annual tax on employees who perform services in the city, with revenues used to fund police, fire, emergency medical and other services.

"The cities believe the costs of these types of services are related to employment levels," Rosenthal and Auxier said.

Retail real estate brokers, owners, developers and advisors at Marcus & Millichap's annual Retail Trends event at the Renaissance Las Vegas Hotel at ICSC on Monday night discussed the effect of e-commerce and other changes in shopping habits that have forced high-profile retailers into bankruptcy and prompted some owners to add food, entertainment or non-retail uses such as urgent-care clinics, hotels, office buildings and multifamily to their shopping centers.

Marcus & Millichap CEO Hessam Nadji said many clients are looking for opportunities to reposition "tired" assets, often with high vacancies and located outside the best trade areas within a market.

"They stop because they don’t know what to do with the asset," said Nadji. "With so many examples of centers repositioned with health care, urgent care, café and entertainment, how should someone in the audience look at that real estate?"

Daniel Hurwitz, the outspoken president and CEO of Raider Hill Advisors and former longtime chief executive for DDR Corp. and recent interim CEO for Brixmor Property Group, said not all ailing centers need repositioning.

"There's a big difference between value-add and distress," Hurwitz said, adding that the asset may be under-managed, under-capitalized or poorly leased by a prior owner. "There could be real opportunities if a new owner can dig in and do your due diligence."

On the other hand, smart retailers won't go near a distressed and structurally weak center with a poor mix of tenants, access issues or declining neighborhood demographics.

"Distressed assets don’t need leasing, they need a bulldozer, and that’s an opportunity, too," Hurwitz said. "You can put for-lease signs up all you want, but a lot of those assets will never be leased for retail again."

Even grocery stores, long considered reliable shopping center anchors, have struggled with competition, price deflation and other factors that will eventually cause chains to fail, noted Eric Termansen, president of Western Retail Advisors, which has advised Whole Foods Stores, Inc. and other chains.

"Aldi is really hungry and they’re aggressively growing throughout the west," Termansen said. "I don’t think they have any intention of letting up or of becoming the next Fresh and Easy."

Newer chains like Lidl and Aldi will continue to push for more locations and lower pricing that cause additional fallout for weaker traditional grocers, he added.

Scott Holmes, a senior vice president and national director for retail at Marcus & Millichap who served as panel moderator, then asked the panelists a key question, "What keeps you up at night?"

"The thing I worry about more than interest rates is tenants’ unwillingness to understand that they're ad merchants," Hurwitz said. "Experience is important, but content is more important. People come to our shopping centers not because we own it, but because we lease to the right tenants that are merchant-driven and understand how to address their consumer."

"It's easy to blame Amazon for everything, but there's been an internal examination by a lot of retailers, particularly in the department store business, where they really became lousy merchants. They lost their place in the imagination of the consumer."

Mike LaFerle, vice president of real estate/construction for The Home Depot, said his biggest challenges revolve around getting products from distribution centers to consumers.

The Home Depot's online platform now accounts for 6.5 percent of total sales, or $6.5 billion, with $1 billion annual growth over each of the last four years, with 24 percent in the last quarter alone.

"We’re going to spend $1.5 billion doubling our distribution footprint from roughly 55 million square feet today to 110 million square feet over next five years," LaFerle said. "That’s going to be a challenge, but with our current footprint, we’ll be within 10 miles of 90 percent of the U.S. population, and we think that gives us advantage over other players."

For First Time in 3 Years, Banks Ease Lending Standards for Commercial Real Estate Loans

MAY 16, 2018

By Mark Heschmeyer

The One Exception: Banks Continue to Tighten Grip on Multifamily Loans

For the first time in nearly three years, U.S. banks are reporting that they have loosened their lending spigots for some types of commercial real estate loans during the first quarter of this year.

The Federal Reserve’s quarterly survey of senior loan officers released this week found that banks are easing standards and terms on commercial and industrial loans to large and middle-market firms, while leaving loan standards unchanged for small firms. Meanwhile, banks eased standards on nonfarm nonresidential loans and tightened standards on multifamily loans. Lending standards on construction and land development loans were left unchanged.

The April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices also included a special set of questions intended to give policy makers more insight on changes in bank lending policies and demand for commercial real estate loans over the past year. In their responses, banks reported that they eased lending terms, including maximum loan size and the spread of loan rates over their cost of funds.

Almost all banks that reported they had eased their credit policies cited more aggressive competition from other banks or nonbank lenders as the reason. A significant percentage of banks in the survey also mentioned increased tolerance for risk and more favorable or less uncertain outlooks for property prices, for vacancy rates or other fundamentals, and for capitalization rates on properties for easing these credit policies over the past year.

A modest number of domestic banks indicated weaker demand for loans across the three main commercial real estate categories, citing a reduced number of property acquisitions or new developments, rising interest rates, and shifts of customer borrowing to other bank or nonbank sources.

Reports of reduced loan demand coincided with the latest CBRE Lending Momentum Index, which tracks the pace of U.S. commercial loan closings. The index fell by 8.8% between December 2017 and March 2018.

"Despite an increase in financial market volatility, real estate capital markets remain in good shape and the supply/demand balance for commercial mortgage lending is favorable to borrowers," said Brian Stoffers, CBRE's global president for capital market debt and structured finance, said in a statement accompanying the index.

"An unanticipated uptick in wage inflation may prompt the Fed to enact additional rate hikes, while the recent 3% breach of the 10-year Treasury could signal a sign of inflation that would result in a more typical yield curve. Nonetheless, all-in financing rates are likely to remain favorable near-term," Stoffers added.

As WeWork Grows, No Single Landlord Seen Having Excessive Leasing Exposure

May 02, 2018

By Jacquelyn Ryan

Co-working Giant has Struck Deals with a Wide Variety of Partners

WeWork leased 222,000 square feet in Boston Properties and Rudin Management's Dock 72 development (pictured above) set to open in the revitalized Brooklyn Navy Yard this summer.

When the much-anticipated Dock 72 office tower opens in the revitalized Brooklyn Navy Yard this summer, Boston Properties Inc. and Rudin Management Co. will become WeWork’s largest landlords by a longshot.

WeWork’s lease for 222,000-square-feet at the joint venture’s $380 million development, part of a larger project to turn that stretch of the Hudson River on the outer borough into a hub for creative and tech firms, brings the Boston-based national real estate investment trust and New York family-real estate firm each up to about half a million square feet in lease agreements with the co-working giant.

That’s nearly double the amount of space WeWork leases with any other landlord in the country now. And still, with all that space, WeWork’s deals with Boston Properties only make up about 0.8 percent of the real estate trust’s 50.3 million square foot portfolio, according to Boston Properties' data. For WeWork, Boston Properties holds less than 5 percent of its more than 10 million-square-foot presence.

That seems to reflect a trend.

While WeWork is expanding at breakneck pace, doubling its footprint nationwide with about 90.5 percent year-over-year growth in 2017, the company has yet to dominate a substantial portion of any large landlord’s portfolio.

Rudin, which also owns the building where WeWork set up its first co-living WeLive concept on Wall Street, holds about 30,000-square-feet less of WeWork’s space than Boston but the co-working firm still makes up less than 5 percent of the company’s office portfolio.

"With a veritable who’s-who of institutional owners lining up to do deals with WeWork, there is still no single owner with significant exposure," read an Eastdil Secured report about WeWork, which it counts as a client, from November.

Dozens of landlords across the country continue to bet big on the co-working company’s success with large--and often discounted--leases.

Among WeWork’s other top landlords is presidential son-in-law Jared Kushner’s real estate firm Kushner Cos., according to CoStar Group data. The New York firm has about 177,000 square feet with WeWork in deals ranging from nearly all of the 95,000-square-foot building at 81 Prospect St. in Brooklyn to a 14,000-square-foot lease at a mid-sized building in northeast Philadelphia.

New York real estate firm L & L Holding Co. has done about 265,000 square-feet in deals with WeWork, including a lease for 171,000 square feet in the 776,000 square-foot building at 222 Broadway in Manhattan, according to CoStar Group data. It represents about 4 percent of that company’s 6 million square foot portfolio.

In general, WeWork's model centers on leasing an office from a landlord for as little as half the asking rate at a building. The company then renovates the space into an open, creative office environment. Other businesses or individuals then rent out the updated space through a membership program at a rate that's inflated by as much as one and a half times.

As it grows, WeWork has been expanding and branching out with new strategies that include co-managing spaces with landlords and buying its own real estate.

WeWork’s aggressive valuation, at around $21.6 billion, outshines even that of Boston Properties, which is closer to $18 billion. Its recent bond offering garnered the company $702 million and upped its cash on hand to $3 billion.

But the bond offering also revealed WeWork has $18 billion in rent commitments over the next several years and that its cash-heavy business model seems to be predicated upon continuing to raise funds through debt and equity offerings.

Some have questioned whether the WeWork model is sustainable--and whether landlords should continue to be so gung-ho about a business that hasn't been tested in an economic downturn.

Brokers say that if landlords are having second thoughts about WeWork after its latest offering, they haven't heard about it yet.

WeWork counts large corporate tenants ranging from Amazon to IBM among its members at locations across the country. But the co-working company also curates an entrepreneurial environment for smaller firms and start-ups that may not have otherwise found office space. And that’s a huge draw for landlords.

"Some people think that co-working environment is the way of the future," said George Crawford, a broker at Charles Dunn Co. in Los Angeles. "It’s a different way for the landlord to accommodate tenants. If you look at the way businesses are kind of growing, you have a lot more entrepreneurs and freelancers, many more small companies that are starting up, using the Internet. If you lease to WeWork--or their competitors --you can lease a bunch of space and let that operator deal with the smaller tenants. Now you can accommodate both" smaller tenants and larger ones.

The diverse economies in cities such as New York, Los Angeles and San Francisco, which together are home to more than half of WeWork’s offices, offer a bit of a security cushion for landlords, too.

Consider that WeWork upgrades its office space--at an average of more than $100 per square foot---into desirable creative space with open layouts and glass walls and touches such as motivational sayings on the walls and beer taps in the kitchens.

Those improvements can prove valuable to landlords even if WeWork vanished suddenly, said Bob Safai, founder of Madison Partners brokerage in Los Angeles. He pointed to the Mani Brothers’ 101,000-square-foot building in Silicon Beach’s Playa Vista where WeWork has a lease for 77,000 square feet. If WeWork moved out, "I could put 10 different tenants in there," he said. "Anything from tech to entertainment. It’s so high-end."

For now, landlords and WeWork seem satisfied in this diversified arrangement.

"The cost savings WeWork can then pass on to corporate clients are a massive accomplishment in technical efficiency, as well as a compelling outsourced service," read a CBInsights report on WeWork, later noting that the company’s "short-term risk of default on its lease obligations seems low, but only given the strength of its balance sheet and deep-pocketed investors."

One thing is certain, with $3 billion in new capital, WeWork shows little sign of slowing down.

The Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency adopted new rules exempting commercial property sales of $500,000 or less from the appraisal requirement. Regulators originally proposed raising the minimum from the current $250,000 to $400,000 but bumped it up to $500,000 after determining the higher threshold posed "no material loss risk to financial institutions."

Under the new rule which used CoStar's comparable sales data and repeat-sale indices to track pricing changes and other sales metrics over time, financial institutions must still perform a property evaluation for deals of $500,000 and below, but do not have to engage an independent appraiser.

"Deregulation is a major theme of the Trump Administration and this updated regulation is a smart move," according to Justin Bakst, CoStar director of capital markets. "Moving the [sale] threshold up to $500,000 creates very little additional risk to the system," he added.

Comps Data Used to Track Smaller Deals

In determining the level of increase, the agencies considered the change in prices for commercial properties measured by the Federal Reserve's Commercial Real Estate Price Index (CRE Index). Since 2012, the CRE Index has been compiled using data from the CoStar Commercial Repeat Sale Index (CCRSI) as one of its data sources.

"The agencies examined data reported on the call report and data from the CoStar Comps database to estimate the volume of commercial real estate transactions covered by the existing threshold and increased thresholds," according to the final rule.

Bakst said the agencies determined the small transactions affected by the new threshold, while large in number, did not create the type of leverage and risk that contributed to the last financial crisis. Banks have healthier capital ratios today and commercial real estate leverage has largely remained well under control, he added.

Banks can perform acceptable loan evaluations in house using sources of comparable sales data like CoStar, Bakst added.

"Although the property sales total affected by this rule change is a drop in the bucket compared with overall commercial property volume, the cost savings are noteworthy," Bakst said. "For example, if we estimate appraisal costs at between $2,000 and $4,000 per transaction, this represents an aggregate savings of $300 million to $600 million."

Banking regulators carved out an exception for construction loans on one- to four-family residential properties, which will no longer be included in the same category as commercial property loans to avoid potential confusion with single-family permanent financing and as an added consumer protection for home buyers. The sale threshold for appraisals on those properties will remain unchanged at $250,000.

Lower Threshold Was a 1990s Relic

Financial industry analysts who commented on the rule change said that the previous commercial transaction threshold had not kept pace with the price appreciation of commercial property.

For example, the average price of a property valued at $250,000 when regulators set the previous minimum threshold 24 years ago in 1994 has now more than tripled to $760,000. Raising the threshold to $500,000 provides a recession-resistant buffer, Bakst said.

Under the new $500,000 threshold, 31.9 percent of property sales in the CoStar database would be exempt from the appraisal requirement. In terms of dollar volume, however, the properties now exempt from appraisals comprise just 1.8% of the overall dollar volume of loans in the CoStar database.

Before the final rule was approved, there were 13 different categories of loan transactions that qualified for exemption from the appraisal requirement, including a general exemption for all real estate-related transactions with a value of $250,000 or less. The new rule adds a 14th exemption for “commercial real estate transactions” not secured by a single 1-to-4 family residential property.

“For commercial real estate transactions exempted from the appraisal requirement as a result of the revised threshold, regulated institutions must obtain an evaluation of the real property collateral that is consistent with safe and sound banking practices," the new rule states.

Are Small Loans Risky for Small Banks?

Some critics, namely appraisers, take issue with the agency findings. James L. Murrett, president of the Chicago-based Appraisal Institute trade association representing nearly 19,000 appraisal professionals in about 60 countries, said raising the threshold is "confounding" given concerns expressed by the same agencies about commercial property pricing and loan risk management.

The OCC and Fed have warned that rapidly appreciating property prices in some commercial property segments and rising concentrations of commercial property loans, particularly among smaller banks with $1 billion to $10 billion in assets, could heighten risk to the nation's banking system.

"Without a doubt, the final rule increases risk to the commercial real estate lending system," Murrett said. “Seen through the lens of loosening regulations, the final rule may make sense. But from a safety and soundness perspective, the final rule raises significant concerns.”

Murrett said that an increase in property evaluations without appraisers will likely cause a return to the conditions during the run-up to the financial crisis, when "appraisal and risk management were thrust aside to make more, not better, loans."

Smaller institutions, which are less likely to maintain appraisal departments, are more likely to be susceptible to breakdowns in appraisal independence with fewer controls in place, he added.

Murrett said the decision increases the importance of modernizing the regulatory structure governing appraisals, including positioning appraisers to better offer evaluation services.

"Appraisers need to be nimbler in today’s marketplace - not only to compete, but to help maintain safety and soundness of the real estate financial system.”

Big Shops Don't Play in Small Loan Pools

Appraisal operations in the largest commercial real estate services companies likely won't be affected by the rule change since their main business is more sophisticated and involves providing valuations for complex property assets priced above $500,000, said John Busi, president of the valuation and advisory group at Newmark Knight Frank.

The appraisal world is getting faster and cheaper and this change creates efficiency for the banking regulators to be a little more nimble and relax some of the standards put in place after the financial crisis," Busi said.

"Of course appraisers are going to be upset by it because many have had business on commercial property under $500,000," said Busi. But he added that smaller appraisal shops should be nimble enough to adapt and bring in work without suffering a large decline in fees.

"We view the recent increases in thresholds for appraisal requirements as an opportunity for lenders, borrowers, and appraisers," added Chris Roach, CEO with BBG, one of the nation's largest pure-play valuation and appraisal companies with 27 U.S. offices.

Roach said BBG's valuation specialists have evolved from a traditional appraisal practice to a more diverse valuation practice for a variety of clients.

"We stand by our high-quality valuation products, no matter the size of the loan," Roach said. "But with these revised loan amount guidelines, we are well-positioned for growth in our evaluation product."

APRIL 26, 2018

When Boston Properties Inc. closes its record-breaking deal to buy the 1.2 million-square-foot Santa Monica Business Park for $616 million this summer, the company will take control of nearly a quarter of Santa Monica’s competitive office space and the rights to acquire the buildings' underlying land for future redevelopment of the 47-acre site.

News of the deal caught some market observers by surprise, but to the Boston-based real estate investment firm’s executives it was the culmination of years of planning and waiting for its opportunity.

"We have had our eye on this property for a long time," said Jon Lange, vice president in Boston Properties’ Los Angeles office, to CoStar News.

The REIT's executives became interested in the Santa Monica Business Park about three years ago, a full year before the company’s first Los Angeles acquisition in 2016, a 50 percent stake in another high-profile Santa Monica office property, the 1.1-million-square-foot Colorado Center office complex.

The low-rise Santa Monica Business Park property has a lot going for it. In addition to being one of the largest concentrations of office space on Los Angeles’ Westside, one of the hottest and most supply-constrained office markets in the country, the office park is nearly fully occupied by a number of desirable tech and media tenants, from gaming company Activision Blizzard to messaging app maker Snap. Located on the eastern side of the city at Ocean Park Boulevard and 28th St., the property sits adjacent to the 227-acre Santa Monica Airport, which is expected to close and transform into a public space in about a decade.

The pending acquisition marks the second in Los Angeles for the publicly traded company, and represents an important step in its expansion in this market, one of just five core markets in which the firm invests.

Boston Properties Chief Executive Owen Thomas said the specific qualities of the property reflect the ways in which the company wants to build its business going forward.

"Unlike the myriad of 200,000-square-foot or less buildings that we have been offered in West L.A. over the last two years this is our kind of project, given its scale, its suitability to larger corporate tenants, the redevelopment opportunities that present themselves over time, and the changing positive dynamics over the next decade given the potential decommissioning of the Santa Monica Airport," he said in an earnings call Wednesday.

When Blackstone Group hired Eastdil Secured to sell the business park last year, Lange said Boston Property was prepared to battle for it.

"When you get the names of Blackstone and Eastdil Secured in a transaction, every major real estate firm in the market will be aware of the opportunity," said Lange. "Given Boston Properties’ presence in Santa Monica and our hands-on approach to operating properties, we felt like we were the best firm suited for this acquisition."

Blackstone acquired the site, which sits on a ground-lease owned by the original developer, as part of its $39 billion buyout of Equity Office Properties Trust in 2007. The private equity giant is seeking to sell this property as well as one in Boston and another in San Francisco as part of its final push to dispose of former EOP assets.

Following a lengthy competitive bidding process that pumped up the sale price to the blockbuster final number, with the Boston firm besting such local rivals as Douglas Emmett Inc., Worthe Real Estate Group, Hudson Pacific Properties and Alexandria Real Estate Equities, which were also vying for the deal.

The contract sale price sets a record in the city of Santa Monica and is among the top sales ever in Los Angeles County, according to CoStar records.

While the company has the balance sheet to pull off the acquisition, Boston Properties is likely to seek an equity partner for the property, CEO Thomas said on the call.

"We do not want to increase the leverage of the company," he explained.

Santa Monica office rental rates in the city can hit as much as $9 a square foot monthly near the ocean, and average $5 a square foot across the city, according to CoStar records. Despite the peak rates, vacancy in Santa Monica is only 7.8 percent.

Following the acquisition, Boston Properties will control about 24 percent of the competitive Class A office space in the city of Santa Monica with its ownership of two of the three largest office projects in the city -- Colorado Center and the Business Park. A unit of JPMorgan Chase owns the third, the 1.3 million-square-foot The Water Garden office complex.

The Santa Monica Business Park’s office buildings are 94 percent leased to 15 tenants including well-known tech and media firms. The majority of the project’s remaining vacancy is connected to leases that have not yet commenced rental payments, Thomas said. Others are paying below market rents that could be increased when renewals come due. Thomas expects the property to generate a 6 percent yield in about five years, he said on the earnings call.

Most of the buildings sit on land owned by original developer, TransPacific Development Co. Boston Properties hopes to purchase that underlying land when that option becomes available in 2028. The buy-out price will be linked to fair market prices at the time of the sale. It is currently estimated at around $250 million, according to a source familiar with the property but not authorized to speak on the record.

"When the ground lease goes away, we think the yield will be enhanced," Thomas added, noting the current ground lease garners a hefty - but undisclosed - payment amount.

In the bigger picture, with this acquisition Boston Properties has the ability to own 47 acres in one of the most supply constrained and highly sought-after office markets in the country.

Down the road, there is likely to be redevelopment opportunity, one of its core strengths. The firm has 13 office and residential developments and redevelopments totaling 6.5 million feet for a total of about $3.5 billion in its pipeline nationwide.

Analysts are reacting positively to the news.

"We believe [Boston Properties] will be able to apply its development and redevelopment expertise and large balance sheet to create value over time," wrote Jeffrey Spector, a research analyst who follows the company for Bank of America.

Boston Properties executives said they expect to have conversations with the city and stakeholders about the future of site when the time is right.

"We hope that at some point there will be a conversation about how the redevelopment of the Santa Monica Airport and the 47-acre site that we will now own (and may have purchased the ground on), how they can be reconstructed and reconfigured going forward over the next decade or so," said Doug Linde, president of Boston Properties, during the REIT's earnings call this week. "We are really excited about the long-term potential to do something here, not the short-term potential."

Based on robust demand for modern logistics space by e-commerce and other tenants, San Francisco-based Prologis this week raised the value of planned development starts by $200 million to between $2.2 billion and $2.5 billion for 2018. Roughly half the new activity is lower-risk build-to-suit construction, Prologis Chief Financial Officer Tom Olinger told investors.

Prologis (NYSE: PLD), by tradition one of the first equity REITs to report earnings each quarter, also increased its estimate of projected building and land sales by roughly $475 million to between $1.4 billion and $1.7 billion for the year. The sell off will effectively complete the company's seven-year campaign to dispose of assets deemed "non-strategy" following Prologis's 2011 merger with AMB Property Corp.

One stock analyst summed it up even more succinctly following the earnings presentation by Prologis, a quarterly bellwether for U.S. and global logistics markets: "Industrial has never been this good."

John W. Guinee, analyst with Stifel, Nicolaus & Associates, said Prologis's extraordinary 9.2% first-quarter rent growth, steady demand from Amazon and other tenants and strong development platform "sets the stage for a strong 2018 and 2019."

The broad strength throughout the logistics sector is likely to be mirrored as Prologis's industrial REIT rivals report their results in coming days.

U.S. warehouse rents posted another stunning quarter of 6.2% average growth, compared with office and retail rents, which each posted less than 2% rent growth last quarter, according to data presented today at CoStar's State of the Industrial Market First-Quarter 2018 Review and Forecast. Multifamily recorded 2.5% rent growth last quarter.

Total U.S. logistics construction deliveries rose 2% in the first quarter from a year ago, on par with the booming apartment market. However, analysts have few worries about a serious supply glut, as absorption continued to outstrip new supply in the first three months, edging out apartments at 2.2%,

"We're seeing construction completions at a stronger pace than the peak of the last cycle," said CoStar Portfolio Strategy Director Rene Circ. "There's no doubt in my mind that developers will eventually overbuild the market, but the beauty of it is that when recession does come, we'll enter it from such a health prospective that the pain felt in the market will be meaningfully weaker than the last cycle."

Prologis, fueled by the strong earnings report, led all equity REITs with a 4.3% increase in its share price on Wednesday. Industrial REITs again led all property sectors with 1.8% average growth, with Prologis rivals Rexford Industrial Realty, Inc. (NYSE: REXR) and Terrano Realty (NYSE: TRNO) turning up among the top five gaining REIT stocks.

Only a handful of factors could derail the world's largest industrial REIT from another strong year, including the prospect of a long trade war between the U.S. and China, which could hurt Prologis and its industrial REIT rivals along with the rest of the economy.

"Any kind of trade war is bad for economic growth generally," Moghadam said in response to an analyst's question. "If the economy grows at 30 to 40 basis points slower than it would have otherwise, that's not good for anybody's business."

The good news is that talks, including President Donald Trump's expressed interest in possibly rejoining the Trans-Pacific Partnership (TPP) trade agreement, are still in their early stages while announced new tariffs have not yet fully gone into effect, Moghadam said.

"All of our customers that I'm aware of, basically, have their head down doing business, and they're not paying too much attention to what comes out in the tweets in the morning until there is something specific they can react to," Moghadam said.

The CEO pointed out that most of the tariffs announced to date have been imposed on raw or intermediate materials, which does not affect Prologis's main logistics and warehouse business.

"Steel doesn't go through warehouses, aluminum doesn't go through warehouses. The simplest way of thinking about it is that while we are concerned by the talk; we are not yet concerned by the action," Moghadam added.

That said, Prologis is carefully monitoring rising construction costs which some analysts have said could be exacerbated by tariff-related increases in materials prices. In the San Francisco Bay Area, for example, costs are up 20% to 25% over last year, Moghadam said.

"[Construction costs] have been stable for many years and now it's time for the contractors and buyers to make some hay while the sun is shining," Moghadam said. "But it's getting tougher to pencil out spec development in some of these markets, and that's good news I guess for rental growth over time."

New tariffs and trade disputes are casting a pall over sentiments across various sectors, even as all 12 regions of the Federal Reserve Bank reported continued robust job growth with few signs of overheating, according to the Beige Book, the Fed's most recent survey of U.S. businesses.

Self-Storage: A Lucrative but 'Get-Rich-Slow Business'

APRIL 11, 2018

Jay Massirman’s specialty is self-storage, one of the more humdrum – but potentially lucrative – niches in commercial real estate.

Massirman’s Miami City Self Storage (MCSS) recently opened a 1,000-unit facility at 490 NW 36th St. in Miami, close to the emerging neighborhoods of Wynwood and the Design District.

MCSS and other developers saw opportunity following the housing bust, when demand outstripped supply. Former homeowners-turned-renters and downtown dwellers who happily eschewed white picket fences and big back yards needed places to stash their stuff.

The NW 36th St. facility is the sixth self-storage project MCSS has built in South Florida, and comes on line a month after it opened its first Broward County location, in Pembroke Park, FL.

MCSS, one of the largest self-storage developers in Miami-Dade and Broward counties, is eyeing returns on cost in the 8 to 9 percent range over the next few years, Massirman said.

“Self-storage is very appealing to developers because you’re building a box and filling it up,” he told CoStar News. “But there are a lot of variables. It’s more of a long-term, patient business. I like to joke it’s a get-rich-slow business.”

None of the company’s six facilities screams self-storage at first glance. The air-conditioned buildings are vertical, with colorful designs that include glass exteriors. What’s more, Massirman hopes to add ground-floor retail to future projects so that consumers can pick up a cup of coffee before squeezing that second hand couch into an 80-square-foot box, he said.

MCSS has six more projects in development across Miami-Dade and Broward counties, which would increase the company’s portfolio to more than 2 million square feet when completed.

While the national outlook generally remains positive, the industry is facing head winds, warned Tom Gustafson, an executive with Colliers International’s Self Storage Group in Cleveland. Supply is starting to exceed demand in some local submarkets.

Nearly 800 self-storage facilities opened across the country last year, Colliers figures show. In the Miami metro, which includes Miami-Dade, Broward and Palm Beach counties, there are 480 existing self-storage facilities, with 66 more in the pipeline, according to New York-based data provider Union Realtime and MiniCo Publishing of Phoenix, AZ.

With the market tightening in South Florida, Massirman is treading lightly on future projects. He said the development cycle is closer to the end than the beginning, with lenders not nearly as eager to provide financing as they were in 2012 and 2013.

Jay Massirman - CEO of MCSS

“I would say the current pipeline is at equilibrium at this point,” said Massirman, a former CBRE vice chairman. “Future deals need to be really and truly (solid). Demand has to be proven out.

“The city of Miami has some extreme competition, and it’s going to be a struggle for a while before some of these buildings get leased up,” he added.

As a result, MCSS is looking at other markets, especially New York, Boston, Los Angeles and San Francisco. Its joint venture partner, Pacific Storage Partners, is considering other opportunities on the West Coast.

The problem, according to Gustafson, is getting municipalities to approve self-storage projects. They prefer multifamily or retail developments because they’re more attractive, benefit more of the community and bring in more income tax revenue, he said.

But Massirman remains undeterred, saying there are still opportunities as long as developers find the right sites. And he believes adding ground-floor retail to self-storage facilities will go a long way toward winning over banks and elected officials.

“If we can solve those problems, it works,” he said. “You have to be creative and roll up your sleeves. That’s the challenge.”

Could Industrial Real Estate Get Caught in Trade War Crossfire?

APRIL 06, 2018

By Jacquelyn Ryan

Logistics Owners, Brokers and Analysts See Little Risk Now from Trump's Challenges to China, but Some Worry About a Full-Scale Trade War's Effect on the Market and Economy

Logistics real estate experts say a prolonged trade-related slowdown in container cargo traffic at the 7,500-acre Port of Los Angeles (pictured), the nearby Port of Long Beach and other major ports could eventually reduce demand for the industrial properties in LA, the Inland Empire and other tier one logistics markets.

credit: Port of Los Angeles

Larry Callahan heads one of the largest developers of industrial real estate in the Southeast, with projects located from Tennessee to Florida.

As the chief executive of Patillo Industrial Real Estate in Georgia, Callahan leads his family-owned business in developing and managing warehouse-distribution projects for businesses as varied as compressor creator Bitzer U.S. Inc. to King’s Hawaiian Bakery.

Like the rest of what is known as the industrial real estate market, the hottest asset class in all of commercial real estate for the past two years, Callahan’s business has been booming.

Right now, he’s not too worried about the impact of President Donald Trump’s posturing on trade.

"I do not believe that the first impact of tariffs (and retaliatory tariffs) has been fully priced into assets like industrial real estate," he said. "And I would argue that the impact of a first round of tariffs on the pricing of industrial real estate is minimal."

But late yesterday, President Trump escalated the risk of a trade war by further increasing proposed tariffs by $100 billion on a number of Chinese products as the two countries continue to exchange threats. The change from campaign rhetoric to trade policy has caught some by surprise.

This morning, Chinese officials threatened further retaliation if the U.S. moves forward with new tariffs.

If fears of a full-scale trade war come to fruition, Callahan sees a different story unfolding. He said the risk to industrial real estate becomes worrisome if a full-scale trade war erupts and slows down the overall economy.

"A no-growth economy hurts everyone," said Callahan.

Callahan echoes what many in the industrial real estate market are saying now about how rising protectionism and a threat of trade war are affecting the U.S. industrial real estate market.

"It would have to be a pretty massive trade war for it to impact industrial real estate directly," said Rene Circ, director of U.S. industrial research for CoStar, adding that anything that impacts the entire economy would certainly affect industrial real estate.

Conditions in the industrial real estate market remain strong - with vacancy at historically low numbers across the nation - but the threats have prompted fears of an all-out trade war between the U.S. and China have left some industrial real estate stakeholders watching events unfold with anticipation.

"If these tariffs become real, they would have an enormous impact," said Richard Green, director and chairman at the USC Lusk Center for Real Estate at the University of Southern California. "If consumer goods become more expensive, people will buy them less and that’s not good for industrial real estate and the warehouses that hold [those goods.]"

Last month, President Trump authorized increases on tariffs on steel and aluminum imports and is considering more in response to China's industrial and technology policies. China retaliated this week by proposing a 25 percent increase on 106 U.S. goods including on such items as soybeans, automobiles, aircraft and orange juice.

The tariffs on steel and aluminum imports prompted dire warnings from architects, contractors, REITs and real estate lobbying groups who said the tariffs could put more pressure on already rising building costs and cause developers and investors to postpone, cancel or steer clear of new projects.

This week, Real Estate Roundtable President and CEO Jeffrey DeBoer said the new proposed tariffs, coupled with the earlier tariffs on steel and aluminum and the ongoing dispute with China, could have "unfortunate and unintended effects on the U.S. economy by raising construction costs and reducing jobs in real estate development."

Everything from consumer goods to physical container traffic could be hit by the tariffs and that could have a domino effect.

"It has been on investors’ minds since Trump took office because there has been discussion about trade wars and what happens if," said Mike Kendall, Western region executive managing director of Investment Services for Colliers International in Irvine, California. "There should be an impact eventually in industrial, but it hasn’t happened yet. The real estate market is not like the stock market. The stock market is real time. In real estate, it takes a lot longer to find its way into the process and pricing. Since it [threat of trade war] is so new, we haven't seen it yet."

A more immediate concern is rising construction materials and development costs, since most of our steel and aluminum is imported from Canada, Mexico and South Korea.

Jeff Givens, senior vice president at Los Angeles office and industrial developer and owner Kearny Real Estate Co., said he has colleagues who already are hitting pause on new development projects.

"I’ve heard from others who are in the bidding process [for a new project], with their different subcontractors involved in steel and other commodities that are being discussed [for increased tariffs]," he said. "They have pulled their current bids and are reevaluating, I have a colleague who was ready to go forward on a big-box warehouse and the steel providers said the bid we gave you six months ago is no longer valid; we’ll get back to you."

That kind of uncertainty has an effect beyond just proposed projects. Bret Hardy, who focuses on institutional industrial investment sales as executive managing director of the Western region capital markets team at Newmark Knight Frank, said while it’s still too early to fully understand the result of the steel tariffs, he's heard estimates that steel costs could increase by as much as 30 percent.

"When you are looking at the infill industrial real estate market in Los Angeles metro that is priced to perfection, any incremental cost of construction could have an equal impact on the value of the land and the value of the projects," he said. "So steel costs are a concern right now."

To be sure, industrial construction doesn’t appear to be slowing down. More than 2.3 million square feet are under construction in the Los Angeles metropolitan area alone, the largest industrial market in the country, according to CoStar Group data. In the industrial market around the Ports of L.A. and Long Beach, the vacancy rate is below 1 percent - and brokers report few signs of pullback.

In neighboring Inland Empire, one of the nation's largest industrial and logistics markets, two deans of the industrial real estate brokerage market agreed that the current atmosphere of protectionism and the prospects of a trade war haven’t been a factor among logistics occupiers, owners and developers. At least not yet.

"There has been no real chatter among warehouse developers or investors out here," said Paul Earnhart, senior vice president with Lee & Associates, who has completed over 1,000 transactions for a combined $4 billion in deal value over more than 30 years in the Inland Empire.

A prolonged conflict with China or worse, a collapse of the current NAFTA treaty affecting two of America's strongest trade partners, Mexico and Canada, could change that over the next year.

"The possibility of a long trade war has been on the mind of most of these logisticians to some extent," acknowledged Chuck Belden, executive vice president with Cushman & Wakefield's Ontario office since 1984.

Late last year, the possibility of a tariff on appliances, combined with fears of the demise of Sears and JCPenney during the holiday shopping season, actually created a temporary bump in demand for Inland Empire warehouse space. LG, Samsung and other appliance makers stockpiled inventory and scooped up space where they could find it in anticipation of the tariff, combined with their reluctance to ship product without prepayment to the two financially ailing department store chains, Belden said.

But recently, the prospect of new tariffs has not had the same effect.

"I haven't seen any pullback in the number of property tours or interested parties," Belden said, adding that most logistics companies and distributors are more concerned about finding available labor, especially drivers. "I've seen a slight pullback in consummated transactions, but that may be a function of a lack of available inventory."

"But if Trump blows up NAFTA, everything I just said goes out the door," Belden said.

Should a proper trade war break out, the impact among industrial real estate may vary by city.

"Population markets have insulation versus a market that is more about serving the population elsewhere," Kendall said. "Some of these markets like Memphis that are big hubs for UPS and FedEx that service national distribution, they may feel more of an impact than primary markets."

Take Southern California, the country’s largest industrial market, for example.

Earnhart noted that one local client, a well-known car windshield installation company, told him late last year that its Chinese supplier, which had previously shipped windshields from China to Southern California, had recently purchased a former auto manufacturing plant in his hometown of Dayton, OH.

Now, 60 percent of the local company's windshields come to its Inland Empire distribution center from Dayton.

"No matter where those windshields are made, they're being warehoused here because this is where all the people live," Earnhart said.

Not everyone is worried about tariffs. Some are optimistic that domestic production picks up where foreign production drops off. Others are betting that the threat of tariffs is just a negotiation strategy that won’t become reality.

For now, Kendall agrees, most industrial real estate stakeholders will take a measured approach, as he recalled discussion of a trade war that never came to fruition last year.

"We have seen this enough before where there’s an overreaction to what happens," he said. "People are almost getting jaded by all this news and are thinking I just need to focus on what actually happens. Until we see an impact, we aren’t going to change our business plans."

As for Callahan, he agrees: "There are always issues to deal with, but we are optimistic about the future."

End of the Line for Toys R Us as Retailer Plans to Close Remaining Stores Totaling About 38M-SF

MARCH 28, 2018

Beloved by kids and landlords but largely shunned by consumers this past holiday shopping season, Toys R Us officially announced this morning that it was calling it quits and would wind down operations, closing its remaining 735 stores in operation encompassing an estimate 29.3 million square feet of mostly big box retail space.

The Wayne, NJ-based toy retailer had already closed or planned to close 8.5 million square feet of its brick and mortar stores as part of the Ch. 11 bankruptcy reorganization it initiated last September. Today's move impacts nearly 33,000 employees, who were told of the company's decision yesterday.

It also wipes out about $1 billion in property value, according to Toys R Us estimates of the difference in value of 791 occupied vs unoccupied stores. The appraised value of the stores unoccupied was listed at $1.55 billion. Toys R Us owns 273 of those stores and either leases or ground leases the other locations.

"I am very disappointed with the result, but we no longer have the financial support to continue the company’s U.S. operations," said Dave Brandon, chairman and CEO of Toys R Us, in announcing an "orderly process to shutter" its U.S. operations.

Despite the closing announcement, there is still a chance that up to 200 U.S. stores could remain open. Toys R Us is negotiating a deal for its Canadian operations and the bidder is reported to be interested in a transaction that could combine up to 200 of the top performing U.S. stores with the retailer's Canadian operations.

A spokesperson for Van Nuys, CA-based toymaker MGA Entertainment Thursday confirmed that CEO Isaac Larian and affiliated investors have made a bid for the retailer's Canada operations. "If there is no Toys R Us, I don’t think there is a toy business," Larian said in a statement. "Toys R Us Canada is a good business. They run it efficiently, and have good leadership. At the right price, it makes economic sense."

While discussions continue on this potential transaction, Toys R Us is seeking court approval to implement the liquidation of inventory in all the U.S. stores, subject to a right to recall any stores included in the proposed Canadian transaction.

At least one expert said that the flood of retail space resulting from the closure doesn’t necessarily represent a catastrophe for the industry.

"Everybody who has Toys R Us in their portfolio, whether you’re managing it or you own it, has been looking for alternate uses really for the past couple of years,” said Gregory Maloney, president and CEO of Retail, the Americas, for JLL. “We didn’t anticipate a full liquidation, to be honest, but we did anticipate a lot of store closures. They announced last year that they were going to close 250 of them... We’ve been prepared for it for the most part, looking for alternate uses for that space or to fill it up with some of the people who are expanding, like Ross or TJ Maxx and so forth.”

Discount clothing retailer Ross announced earlier this week it plans to open 100 new locations this year.

"So really it’s just confirmation now that this is what’s going to happen," Maloney said. "Quite frankly, it sounds a little strange but now that we know it’s a lot easier to deal with than the unknown. The past couple of years have been, ‘well, do you think we’re going to get this back?' Now that we know what we’re up against, we can start getting to work and fill the space."

Malls are being reimagined with other uses replacing retail - such as office, hotel and multifamily uses - which could be options for the Toys R Us space, he said.

In addition, the giant toy retailer often took so-called endcap space, at the corner of malls, which is desirable for other commercial tenants, according to Maloney.

"Good locations are always easy to fill," he said.

And of Toys R Us’ roughly 700 stores overall, “probably half of them are great locations, where a lot of those developers want that space back anyway,” according to Maloney.

Jeff Holzmann, managing director of iintoo, a real estate investment firm in Manhattan, wasn’t quite so upbeat about the situation.

“When you think of the basic equation of supply and demand, when you think about the sheer footage that they’re going to be dumping in the market, probably within the next 12 months, that’s going to cause without a doubt a situation that we call a supply surplus,” he said. “So right off the bat that’s going to create a downward pressure on the rental prices in those submarkets. But we have to be very careful because the devil’s in the details.”

Holzmann said that some of the Toys R Us stores are not in malls, but are adjacent to them with large square footage, the kind of space that expanding fitness centers or activity gyms for kids and other national chains might be interested in.

“The sheer size of square footage that’s being dumped into the market is going to overwhelm any potential offset demand,” Holzmann said. “There’s going to be a surplus supply without a doubt. The question now becomes what kind of chain, and to what extent, can seize the opportunity. There is certainly going to be some, because the market is always going to seek equilibrium. And there are chains that are growing in this economy specifically in and around malls. But I think the volume here and the trend here is alarming.”

Meanwhile, the liquidation process will take time, according to Maloney.

“Everybody thinks they (the Toys R Us stores) close tomorrow,” he said. “It doesn’t happen that way. It’s generally an organized closing. They need to liquidate all of the merchandise, and you can’t just send it to one store. And that will be good for the owners because it gives them time. 'OK, This store is going to be closing, this is when it’s going to close, what players are in the market and let’s go after them and get them.’”

Although Toys R Us officials said they did not foresee today's outcome when the retailer initially filed for bankruptcy reorganization last fall, the timing of the bankruptcy heading into the crucial holiday shopping season appeared to contribute to a negative perception among shoppers regarding the retailer's viability.

The retailer reported dramatically lower than expected holiday sales, which the company had been counting on to bolster support among its creditors, the company detailed in a bankruptcy court filing yesterday.

Holiday sales came in well below its worst-case projections. The company also cited a combination of other factors, including delays and disruptions in its supply chain and increased price competition with Target, Walmart and Amazon, the company said.

Following the holiday sales season, Toys R Us projected that its cash-burn was expected to reach between $50 million to $100 million per month.

"It became clear that a significant investment of several hundred million dollars would be needed just to keep 400 stores operating before the 2018 holiday season," the company said.

As of yesterday, the retailer said it had contacted over 40 parties regarding potentially financing or purchasing any or all assets of the U.S. business, a deal that would have required a commitment of over $250 million just to cover cash-burn until the 2018 holiday season.

"Put simply," the company said, "in these circumstance, no parties were prepared to underwrite the U.S. operations as a going-concern."

Faced with those circumstances, Toys R Us determined that the best way to maximize their recoveries was to liquidate its remaining inventory and go out of business.

The Amazon Effect: What Would Happen to Apartment Rents if Your City is Picked for HQ2?

MARCH 08, 2018

By John Doherty

Projected Impact Varies Across 20 Finalists with Market Size and Construction Pipeline Being Major Factors

If Amazon picks your city for its new co-headquarters, what impact would it have on your local apartment market?

CoStar’s quantitative research team applied a new forecasting model that predicts how the projected 50,000 new jobs Amazon is expected to generate would affect apartment demand, rent growth and rental property values based on historical apartment demand generated by employment gains in the markets under consideration. Amazon has named 20 cities as finalists for its new co-headquarters - dubbed HQ2.

The results suggest that the smaller markets under consideration, such as Nashville, Raleigh and Columbus, would see the most disruption. By the end of 2026, when Amazon is expected to be settled in its new HQ2, Raleigh would see average apartment rents rise 9.6% due to the Amazon effect alone, according to CoStar’s forecasting model. That’s the biggest bump of any of the 20. Nashville rents would rise 6.7%, and Columbus’ would increase an additional 5.9% thanks to Amazon.

New York, Chicago and other major markets would see Amazon have virtually no effect on rents, due to their huge inventory of rentals. Those cities would see Amazon push average apartment rents by just a single percentage point.

Boston, one of the early favorites for HQ2, has a robust multifamily construction pipeline and CoStar predicts Amazon would add an average increase of just 2.4% to the market’s rents. Philadelphia, which has seen a steady stream of rental development during the economic recovery, would see rents rise just 2.1%

"The Amazon effect is in direct proportion to the size of the markets" says John Affleck, CoStar Director of Analytics. The larger markets - and markets with a significant existing pipeline of new apartment construction - could absorb the tech behemoth’s arrival fairly easily. "But smaller markets like Raleigh and Nashville, and even Austin, could see a pretty significant effect."

CoStar’s forecasting model predicts that rental property values would rise at about the same level that rents do. Amazon would lift apartment property values in Denver, for example, by about 4.6%, as rents would inch up 4.4% due to Amazon’s arrival.

The Washington market, which includes the suburban Maryland suburbs and Northern Virginia, would experience just a 1.2% rent bump by the end of 2026 due to Amazon. (Amazon is considering three different sites in the Washington area - leading many watching the process to suspect the area has an inside track at landing the project).

CoStar’s model estimates the effect new jobs and apartment supply have on the market’s vacancy rate. However, the model makes no allowance for how multifamily developers may respond to news that Amazon has chosen their city.

Michael Wolfson, associate director of capital markets research for brokerage Newmark Knight Frank, says multifamily developers are already preparing to pounce when Amazon makes its decision. "There are developers sitting there licking their chops, telling their partners we’re going to raise money now, to be ready," says Wolfson. Builders would be looking for quick turnaround for any new projects to take advantage of Amazon’s arrival. That’s easier in some markets - like Austin and Dallas - than others - like New York where permitting can take months or years.

Wolfson thinks it’s possible Amazon itself could become a player in some of the local rental markets.

Last year, as Oracle expanded its Austin campus, the tech firm bought a 295-unit apartment complex to use as transitional housing for employees moving to the new campus. If Amazon chooses a supply-constrained market, it too could decide to invest in the rental market.

Meanwhile, the wait goes on as Amazon weighs a slew of factors in making its selection, including the amount of available office space, transportation and infrastructure condition, and local culture and entertainment options. Access to technology talent is also expected to be crucial.

New data and commentary from federal financial regulators are pointing to signs of increased risks in CRE lending.

Notably, the amount of delinquent multifamily and owner-occupied property loans on the books of U.S. banks increased in the fourth quarter of last year, according to statistics released this week by the Federal Deposit Insurance Corp. (FDIC).

And while the increases and total volumes are small, the uptick marks a change in the trend after multifamily delinquency levels hit the lowest mark ever recorded by the FDIC. The FDIC also reported a second quarterly increase in delinquencies for owner-occupied property loans, although by a low 0.4% to $6.74 billion.

The change in multifamily loan deliquency was more dramatic percentagewise, increasing 14.4% from the third quarter to the fourth quarter of 2017 to $1.08 billion. That change iin direction follows decreases of 4%, 8.1% and 9.8% over the first three quarters of 2017.

"Valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate," the Fed noted in its report.

"In a sign of increasing valuation pressures in commercial real estate markets, net operating income relative to property values (referred to as capitalization rates) have been declining relative to Treasury yields of comparable maturity for multifamily and industrial properties. While these spreads narrowed further from already low levels, they are wider than in 2007," the report noted.

FDIC chairman Martin J. Gruenberg this week said that the interest-rate environment and competitive lending conditions continue to pose challenges for many institutions.

"Some banks have responded by 'reaching for yield' through investing in higher-risk and longer-term assets," Gruenberg said. "Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path. These challenges facing the industry will remain a focus of supervisory attention."

Gruenberg earlier noted the challenge facing the FDIC is to preserve improvements in the capital and liquidity of U.S. banking institutions and to "continue the strong performance of banks during the post-crisis period and to position the banking system to weather the next, inevitable downturn.

"By many measures, stocks, bonds, and real estate are richly priced. Stock price-to-earnings ratios are at high levels, traditionally a cautionary sign to investors of a potential market correction," Gruenberg noted in the FDIC's recent 2017 annual report. "Bond maturities have lengthened, making their values more sensitive to a change in interest rates. As measured by capitalization rates, prices for commercial real estate are at high levels relative to the revenues the properties generate, again suggesting greater vulnerability to a correction."

Meanwhile, the total amount of commercial real estate loans held by U.S. banks and savings and loans continued to swell.

The total amount of CRE loans outstanding held by FDIC-insured institutions increased 1.2% to $2.13 trillion at year-end from the third quarter. That compares to an increase of 1% from mid-year to third quarter, according to the FDIC.

The $2.13 trillion year-end 2017 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.

Total loan amounts outstanding increased in every category of CRE lending broken out by the FDIC.

Meanwhile, real estate lending by banks increased in some areas while moderating in others. Construction and development loan totals jumped by $7.43 billion (2.2%) to $339.7 billion. Owner-occupied CRE loans increased $4.77 billion (0.9%) to $530.3 billion. The rate of increase in both of those categories exceeded the rates of at which those categories grew on average last year.

The rate of increase for the two other categories -- other nonresidential and multifamily -- were below the rates of at which those categories grew on average last year. Other nonresidential CRE increased $8.66 billion (1%) to $860.7 billion. And multifamily increased the least, $3.73 billion (0.9%) to $404.1 billion.

Declining Occupancy, Rent Growth Spreading to Top Tier of Best-Located US Retail Properties

FEBRUARY 22, 2018

The largest investment sale transactions of the fourth quarter included Albertsons' $721 million sale-leaseback of 71 properties across 12 states, including this Safeway property in Florance, AZ.

Even the best performing and most well located U.S. malls and shopping centers are beginning to feel the pinch of flat-lining rent growth and a vacancy uptick as e-commerce continues to take market share from brick-and-mortar retailers and the retail sector enters the late stages of the real estate cycle.

Despite a relatively strong finish for retailers in the final three months of 2017 buoyed by improved consumer spending and an expanding economy, demand for U.S. retail property was generally lackluster for the year, according to market highlights presented by CoStar managing consultant Ryan McCullough and director of U.S. research Suzanne Mulvee in the Fourth Quarter 2017 State of the U.S. Retail Market.

"All told, we are seeing some signs of a slowdown in the retail market," said McCullough, noting that retail absorption totaled about 69 million square feet for 2017, down about 30% from 2016 and 2015 levels, with developers expecting to deliver roughly 80 million square feet of new retail space in 2018 as demand from retail tenants begins to soften. "Given the slowdown in demand and some uptick in supply, we might anticipate the national retail vacancy rate, which went flat in 2017, to start to rise modestly in 2018," McCullough said.

Reflecting slowing investment sales volume observed by CoStar analysts across all commercial property types, retail investment fell to just below $20 billion in the fourth quarter, its lowest level since mid-2014. In addition to a diminished appetite among cautious buyers, many sellers are also pulling properties off the market after failing to achieve pricing that meets their expectations, McCullough said.

Top Centers Seeing Rent Erosion

One sign of the softening market conditions is a moderate rise in vacancies and flat-lining of rental rate growth in recent quarters at the country's top located and most productive Class A malls, urban luxury centers and shopping centers. These properties have consistently logged the highest location quality scores, as ranked by CoStar’s proprietary formula measuring the combined effects of demographics, density of surrounding commercial property and market competition on individual retail centers.

While retailers are readily absorbing some new supply entering the market, especially spaces of 20,000 square feet and below, larger boxes in certain centers that are ranked in the top 10 percentiles of location quality are in many cases taking longer to lease up, reflecting broader weakness among U.S. power center tenants.

Meanwhile, at the opposite end of the quality spectrum, the number of "zombie" power centers with vacancy rates of 40% or more has increased 60% since 2016 due to a spike in store closures by Kmart, Toys R Us and other big-box retailers and grocers. The closures and bankruptcy filings are mounting weekly and likely will not abate any time soon. Toys R Us plans to close another 200 stores and lay off corporate personnel, in addition to 170 previously announced store closures, the Wall Street Journal reported Thursday. On Wednesday, Northeast supermarket chain Tops Markets LLC filed for Chapter 11 bankruptcy protection.

Grocery Centers May Face Increased Risk

In contrast, the neighborhood grocery anchored retail segment has continued to see good demand growth and falling vacancies, the CoStar market analysts reported. Even these reliable performers, however, may be facing some underlying risk due to over-retailing and tenant competition in coming quarters.

"Because many developers and landlords still consider the grocery anchored sector to be a safe defensive play against e-commerce that brings foot traffic, we are continuing to see more absorption and development that could perhaps lead to issues with oversupply," McCullough said.

While total retail space per capita has decreased by about 5% since 2009, the amount of anchored space per capita has increased by the same amount during that period amid competition from big-box chains that have added food and groceries to compete with grocery chains.

"We're seeing increasing delinquency rates in CMBS issuance among centers with mid-market grocers such as Albertsons, Winn Dixie and even Publix as a large tenant," McCullough said.

Overall U.S. retail rents increased another 1.7% in the final three of 2017 to $20.67 per square foot. However, the growth rate has slowed over the past 12 months from the average 3% growth seen over the past three years as asking rents have moderated in New York City, San Francisco, Miami, Boston and other core markets.

Demographics are again driving rent growth, with Atlanta, Charlotte, Las Vegas and other high-population-growth metros recording some of the strongest rent growth in 2017 as homebuilding and commercial construction have finally picked up, while markets with stagnant or even negative population growth such Hartford, Long Island, Chicago and New Orleans logged very few rent gains. Rent growth has also started to decline in retail centers with a location quality scores above 90 in recent quarters.

In spite of the threat of online competition and store closures, total monthly retail sales grew by an average 0.5% per month last year from an average 0.2% in 2015 and 2016, with gains driven by increases in health-care and personal care and building materials and supplies reflecting the growing strength in the housing market. On the other hand, apparel and furniture sales lagged in 2017. The decline in clothing sales particularly worrisome as apparel tenants occupy an estimated 64% of mall and department store space, Mulvee said.

Despite hitting a soft patch, overall U.S. retail sales continued to trend in the right direction at about a 4.2% annual increase in January, according to U.S. Census data released last week. Increases in personal income and the positive impact of tax cuts could position 2018 as a stronger year for consumption, Mulvee said.

Investors Chasing Quality, Income Reliability

The retailer distress that has pressured comparable-store sales and fundamentals has affected the capital markets. The U.S. Retail Index of the CoStar Commercial Repeat Sale Index (CCRSI) began to decline in 2017, though it rebounded in the second half to end the year with a net 10% gain from 2016.

Investors are generally seeking highly productive assets with high location-quality scores and capitalization rates are now trending upward on sales of lower-quality assets, Mulvee and McCullough said. While well-performing Class A mall are trading at a premium compared with past cycles, an average of $387 per square foot compared to $347 in 2005-2007, B and especially C malls are trading at a sharp discount of up to 50% compared with the 2005-2007 boom years.

Investors are also rewarding in-place tenancy, with triple-net lease deals comprising nearly 20% of total retail sales volume in 2017, an increase of about 9% over the 2009-2012 period, McCullough said. The largest transaction of the fourth quarter was the sale-leaseback by Albertsons of 71 stores across 12 states to Cardinal Capital Partners, Inc. for $721 million at a 6.5% cap rate.

Some well-located power centers also changed hands in 2017, including the 426,000-square-foot Centerton Square in Mount Laurel, NJ, sold by Black Creek Diversified Property Fund, Inc. to Prestige Properties & Development Company, Inc. for $129.6 million, or about $303.93/SF, at a 5.8% cap rate.

McCullough noted that location score for Centerton, which was fully leased to Costco and Wegman's at the time of the sale, ranks a solid 95 due to its affluent demographics and a significant nearby office and hotel presence.

FEBRUARY 15, 2018

by Garry Marr

Combined Firms Will Have Enterprise Value of $16 Billion with 752 Properties Totaling 69 Million SF

Choice Properties Real Estate Investment Trust has agreed to buy Canadian Real Estate Investment Trust in a $6 billion transaction they say will create the largest REIT in Canada with a combined enterprise value of $16 billion.

Toronto-based Choice Properties REIT said it would acquire all CREIT's assets and assume all of its liabilities, including long-term debt for $22.50 in cash and 2.4904 Choice Properties units per CREIT unit, on a fully pro-rated basis.

"We are excited to be creating Canada's leading diversified REIT. Choice Properties' expanded, diversified real estate portfolio, anchored by Canada's largest retailer, will provide unitholders of both Choice Properties and CREIT the opportunity to capitalize on the future growth and value creation opportunities of this strategic transaction," said John Morrison, president and chief executive of Choice Properties, in a statement.

The combined entity will have a portfolio of 752 properties made up of 69 million square feet of gross leasable area. Loblaw Companies Ltd. and George Weston Ltd. will have combined proforma ownership of 65%.

The companies say the combined entity will be Canada's preeminent diversified REIT. The retail portfolio, which will make up 78% of net operating income and is focused on what the pair call "necessity-based retailers" that makeup 85% of the retail assets. Industrial assets will contribute 14% of NOI of the combined REIT with office assets making up the remaining 8%.

Stephen Johnson, chief executive of REIT, said the combination also provides tremendous opportunity for Choice Properties to capitalize on the firms' combined development pipeline to create long-term value.

"Together, the combined REIT is uniquely positioned to deliver results for unitholders as the owner, manager and developer of a high-quality portfolio of diversified assets," Johnson said in a statement.

In the new combined REIT, Morrison becomes the vice-chairman of the board of trustees while Johnson will become president and chief executive.

Using the Choice Properties closing unit price on February 14, 2018, of $12.49, the deal equates to a price of $53.61 per CREIT unit, a 23.1% premium to the CREIT closing unit price on February 14, 2018.

The total consideration consists of about 58% in Choice Properties units and 42% in cash. CREIT unitholders will have the ability to choose whether to receive $53.75 in cash or 4.2835 Choice Properties units for each CREIT unit held, subject to proration. The maximum amount of cash to be paid by Choice Properties will be approximately $1.65 billion, and approximately 183 million units will be issued, based on the fully diluted number of CREIT units outstanding.

CREIT's board of trustees has recommended unitholders vote in favour of the transaction. Choice Properties' board has unanimously determined that the deal is in the best interests of Choice Properties.

Liberty Planning to Sell Remaining Suburban Office Holdings for Up to $800 Million

FEBRUARY 8, 2018

By Randyl Drummer

REIT Looking for Buyers to Take Remaining Office Assets in Philadelphia, Tempe Off its Hands

The Vanguard corporate campus in Malvern, PA, is among the suburban office assets valued at up to $800 million that the REIT intends to sell this year. Credit: CoStar

Ramping up its transition out of the office sector and into the businiess of owning warehouse and logistics property, Liberty Property Trust (NYSE: LPT) said this week that it hopes to raise up to $800 million for reinvestment into industrial acquisition and development by divesting its remaining suburban office portfolio by the end of the year.

"We intend in 2018 to dispose of all of our remaining suburban office properties and redeploy these proceeds into our accretive development pipeline, along with industrial acquisitions within targeted markets," Liberty CEO Bill Hankowsky told analysts in a Tuesday conference call. "We anticipate asset sales of at least $600 million to $800 million."

While most of those properties designated for sale are located in the Philadelphia suburbs, "we also expect to take advantage of the market and selectively harvest value," Hankowsky added.

Liberty will plow proceeds from the sales into its growing industrial platform, acquiring $400 million to $600 million of industrial properties in target markets and starting up to $600 million worth of development projects, he added.

As part of its ongoing shift, Liberty last month sold a 641,000-square-foot suburban office portfolio in King of Prussia, PA in the Renaissance Park corporate center for $77 million. The REIT also disclosed the pending sale of 779,000 square feet of additional office space in the Philadelphia region, with multiple contracts totaling $107 million.

Liberty executives said the properties being put on the market include the Vanguard corporate campus, a six-building office complex in Malvern where the REIT is based. The company will also sell its Malvern headquarters and holdings in Tempe, AZ.

With Demand Drivers in Place, U.S. Office Market Expected to Continue Cruising into 2018

JANUARY 25, 2018

The $333 million purchase of a 9-building office portfolio by Starwood Capital Group in Austin is an example of heightened institutional interest in suburban office.

The U.S. office market continued to benefit from strong fundamentals going into 2018, despite continued deceleration in net absorption, occupancy and rental rate growth.

With robust corporate profits and continued office-using job growth, that trend is expected to hold through the year as the recently approved tax cuts and expected gradual increases in interest rates make U.S. office and other institutional-grade property types an attractive place for investors to park capital and get cash flow.

"You're going to like GDP growth over the next few months," CoStar Portfolio Strategy's Hans Nordby said during CoStar's year-end 2017 State of the U.S. Office Market report, co-presented with managing consultant Paul Leonard. "Corporate profit growth is a good story, and if you already think it's strong, look underneath the hood. It's even better."

The improved profit growth outlook for the services sector and other industries that drive office demand, along with expected higher GDP growth projected at a very strong 2.5% to 3% in the next few months, should help office job growth hold steady at strong levels for the next few month, Nordby said.

The U.S. office vacancy held steady at 10.1% at the end of the fourth quarter 2017, unchanged from the same period a year prior, despite a large amount of new supply and a 20% decline in office net absorption to 65 million square feet for 2017.

Meanwhile, the total amount of office property acquired by investors declined about 15% in 2017 from the prior year, largely due to a sharp drop in office trades in New York City and other gateway markets.

Despite the declining sales volume, average prices in primary markets continued to rise, prompting investors to fan out into secondary markets such as suburban Phoenix, where Transwestern Investment Group and JDM Partners acquired Marina Heights, State Farm's office campus in Tempe, AZ, for $930 million at $459 per square foot.

Signs of a deceleration in office sales and leasing are evident in several office boom markets, however, including Nashville and San Jose in California's Silicon Valley. Developers delivered 2.9 million square feet in Tennessee's Music City and 8.5 million square feet in San Jose as projects started during the height of the current cycle joined office inventory.

In a positive sign, the brand-new stock in both markets is already about 80% occupied thanks to strong leasing by health-care tenants and tech companies such as Apple and Google.

"We've definitely seen a peak in the office market," Leonard said. "Everywhere across the board, we're starting to see a deceleration."

Leonard sees the national office vacancy rate ticking up beginning this year through 2020 as the expected new supply of space finally begins to outpace demand.

Another sign of the slowing office market is the continuing decline in the percentage of U.S. submarkets posting occupancy gains. At the beginning of 2016, more than 60% of office submarkets saw occupancy gains, according to CoStar information. A year later, that number has fallen to less than half.

Despite speculation about over the last few quarters about a potential bubble in technology stocks and a decline in venture capital funding, tech tenants continued to log huge absorption gains in the office leasing market. Office sharing firm WeWork led all companies with more than 7.5 million square feet of office space leased in 2017, one-third of that total in New York City alone. Amazon and Apple, which each made major announcements last week regarding future office campuses, each leased more than 3 million square feet. Google, Salesforce.com and telecommunications companies AT&T and Verizon also ranked in the top 10 in office leasing last year.

Moreover, availability rates for sublease space have fallen over the past few quarters after ticking up in markets such as San Francisco and Houston in 2016 through early last year during a pause in tech's dizzying growth of the previous few years.

Star Turn for Suburban, Tier 2 Markets

The largest investment deals of the fourth quarter reflected both the continued health of transaction activity and pricing in core coastal markets as well as rising investor interest in suburban, secondary and even tertiary office markets.

In the west, suburban Los Angeles submarkets like Torrance and El Segundo in L.A. County's South Bay are warming up in the wake of the downtown and Westside office boom. Starwood Capital scooped up Pacific Corporate Towers in El Segundo for $605 million, $381/SF, from a JV of Blackrock and General Motors Pension Trust.

Breaking News: Amazon Narrows HQ2 Search to 20 Markets

JANUARY 18, 2018

By Randyl Drummer

E-Commerce Giant Includes Many Major Markets but Also a Few Surprises in Running for $5 Billion, 50,000-job HQ in 2018

Amazon (Nasdaq: AMZN) issued a short list of 20 metropolitan areas making the next cut in the competition to host the company’s second North America headquarters. This top 20 were narrowed from 238 proposals Amazon received from across the U.S., Canada, and Mexico in an unprecedented bidding process to host the company’s second North America headquarters.

Amazon said it will work in coming months with each of the candidate locations to request more information and "dive deeper into their proposals" for the internet retailer's planned $5 billion investment and up to 50,000 employees, a partnership expected to bring profound economic development benefits to the winning market.

Editor's note: More to follow as CoStar News updates this breaking news story throughout the day. Updated: 2:50 p.m. EST

The next cut for the massive headquarters includes expected contenders such as New York City, Chicago, L.A. and D.C., but also several smaller markets such as Raleigh, Indianapolis, Columbus, Newark and Pittsburgh. Amazon listed the metros in alphabetical order and offered no signals about which geographic area or market the company would prefer.

The early morning decision brought swift reaction from local officials vying for the headquarters.

"We are beaming right now," said Kelly Smallridge, president of the Business Development Board of Palm Beach County, FL, of Miami's inclusion on the list. "South Florida is hip, chic, urban and we’re attractive to millennials. I’m not surprised at all that we made the list."

The South Florida counties of Palm Beach, Broward and Miami-Dade teamed to present a regional bid to Amazon that included confidential real estate sites in each county, Smallridge said.

"Over the coming weeks and months, we look forward to working more closely with [Amazon] to show them why Music City would be the perfect fit for their company," Nashville Mayor Megan Barry said in a Twitter post.

Indianapolis Mayor Joe Hogsett tweeted that Central Indiana’s "unique combination of connectivity, quality of life, and affordable living has once again put us on the global stage." In a statement, Hogsett said the inclusion shows that "every day we are gaining more recognition as a growing tech hub."

"As a thriving city with a talented and diverse workforce, culture of innovation and opportunity for all, I see no better city than Boston for Amazon to call their second home," Boston Mayor Martin J. Walsh said in a statement.

While Boston shares finalist status with 19 other cities, locals feel Beantown may have better odds than most of its competitors. That feeling was bolstered when it was revealed two weeks ago that Amazon was already seeking to lease up to 1 million square feet in the city.

Amazon has been looking to land space in the city’s revamped Seaport District, separate from the headquarters search. Boston's official bid for the new Amazon headquarters is focused around the 161-acre Suffolk Downs horse racing track property in East Boston and neighboring Revere. The company already employs about 1,000 people in the city.

Which US Region Has the Edge?

As the day progressed, analysts speculated on what part of the country has a higher probability of landing the coveted headquarters. Among other observers, Stephen Basham, CoStar senior market analyst for the Los Angeles market, believes Eastern markets have an edge.

"Amazon looks to be interested in expanding their geographical footprint," Basham said. "Three-fourths of the finalist cities are east of the Mississippi River, and Los Angeles was the only West Coast metro to make the cut."

The selection of three metros in the Washington, DC/Maryland/Virginia region has to position the region among the favorites, Basham said. As has always been the case, though, the final pick will likely hinge on what specific incentives and concessions the candidates are willing to offer.

"It would be hard to overstate the impact that an Amazon headquarters would have," Basham added. "You just have to look at how Seattle has transformed over the past 10-15 years as an example of a major metro that has been reshaped and revitalized by a single company."

Residential REIT analyst Aaron Hecht of JMP Securities opined that Atlanta or Austin are the most likely destination due to their active tech industry bases, quality higher-education institutions, favorable cost of living and low corporate tax rates.

"Although a number of East Coast cities have stronger strategic geographic locations to conduct business internationally, we believe the benefits being offered by many of those cities will ultimately be watered down by local politics," Hecht continued.

"With Amazon already having its first headquarters in Seattle, which has a high cost of living and with local politicians looking to increase taxes on high wage earners, we believe the company will look for a city with more conservative views on tax policies," Hecht said.

Amazon said its HQ2 will be a complete co-headquarters and not a satellite office. In addition to direct hiring and investment, construction and ongoing operation of Amazon HQ2 is expected to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding region.

Over the past five years, Amazon has invested more than $100 billion in the U.S., including corporate offices, development and research centers, fulfillment infrastructure and compensation to the company's 540,000 employees.

"Getting from 238 to 20 was very tough," said Holly Sullivan, of Amazon Public Policy. "All the proposals showed tremendous enthusiasm and creativity. Through this process we learned about many new communities across North America that we will consider as locations for future infrastructure investment and job creation."

The 20 metropolitan areas advancing to the next phase of the process include the following:

Sam's Club Abruptly Closes 63 Stores

JANUARY 11, 2018

Not All Going Vacant as Walmart Subsidiary Will Convert 10 to Ecommerce Fulfillment Centers

Sam's Club, a division of Wal-Mart Stores Inc. (NYSE:WMT), abruptly posted closure notices on 63 of its stores across the country yesterday.

The closings impact about 10% of its fleet of 660 clubs and are expected to affect about 10,000 employees, according to various media reports.

The action was taken after a thorough performance review.

"Transforming our business means managing our real estate portfolio and Walmart needs a strong fleet of Sam's Clubs that are fit for the future," said John Furner, president and CEO of Sam's Club. "We know this is difficult news for our associates and we are working to place as many of them as possible at nearby locations. Our focus today has been on those associates and their communities, and communicating with them."

Sam's Clubs stores average 134,000 square feet, which would mean that closures could impact about 8.4 million square feet of 'big box' retail space. However, not all of it will end up vacant.

Sam's Club said it is converting 10 of the closed locations into e-commerce fa store at fulfillment centers, and possibly up to 12. The first of the conversions will be for a 120,000-square-foot store at 1805 Getwell Road in Memphis.

Walmart owns most of its Sam's Club stores (591 out of 660), the others are leased. Sam's Clubs stores in the U.S. post about $57 billion in revenue per year and account for about 12% of Walmart's total sales.

Walmart reported that Sam's Club comparable store sales were up 2.8% year-over-year and that foot traffic was up 3.6%

The company will record "a discrete charge" of approximately $0.14 per share related to these actions or approximately $414.73 million.

JANUARY 08, 2018

By Mark Heschmeyer

U.S. Real Estate Still Viewed as Most Stable in the World

Among foreign investors, interest in New York has slipped and London has assumed first place as the top global city for their real estate investments, according to the results of a new survey of members of the Association of Foreign Investors in Real Estate (AFIRE) released today. In last year's survey, London ranked third globally; Los Angeles ranked second among U.S. cities and fourth globally.

"A year later, foreign investors are less concerned about the ramifications of Brexit," said, Edward M. Casal, AFIRE's newly elected chairman, and chief executive, global real estate, of London-based Aviva Investors, explaining London's rebound. "At the same time, the London market has been buoyed by several large sales over the last year. London has a number of attributes as a location for investment, including a stable rule of law, transparency, and use of the English language. In addition, a favorable time zone for international business, deep labor pool, and cultural attributes also help."

Rounding out AFIRE members' list of top five global cities, in order, are: New York, Berlin, Los Angeles and Frankfurt.

San Francisco, which has been on investors' top five global cities list since 2011, fell into 11th place, and Washington, DC continued its slide among global cities, falling from 15th place last year to 25th this year.

Nonetheless, by a substantial margin, the U.S. was ranked as the number one country for planned real estate investment in 2018 followed by the U.K., Germany, Canada, and France. Survey respondents cited the U.S. market's stable economy, transparent capital markets, and reputation for innovation as the primary factors favoring investment. They pointed to senior housing, infrastructure, medical office buildings and student housing as options for alternative asset classes.

Industrial Boosting Los Angeles

And for the first time, Los Angeles has tied New York as the number one city in the U.S., boosted by its position as a leading global port. New York had been named the top U.S. city for the last seven years, holding a substantial lead over Los Angeles. As recently as 2014 Los Angeles was in fifth place among U.S. cities before moving up to second place in 2016. The remaining top five U.S. cities, in order, are: Seattle, Washington DC, and San Francisco. Seattle moved up from fourth place and Washington rejoined the list after falling off into sixth place last year.

"With the growth of on-line shopping, foreign investors continue to rank industrial / logistics properties as their number one investment opportunity," said Jim Fetgatter, chief executive of AFIRE. "The cargo coming into the Port of Los Angeles represents 43% of all cargo coming into the United States. Respondents also say on-line shopping is likely to have the biggest effect on real estate over the next five years. With these as benchmarks, it's easy to see why investors would be bullish on Los Angeles."

In 2010, industrial real estate was lowest-ranked among leading property types. This year, and every year since 2013 it has ranked first, except for 2014, when it was second-ranked. Meanwhile, retail property fell into fifth place; multifamily and office remained in second and third places respectively, and hotels, long in fifth place, moved into fourth.

U.S. Real Estate Still Viewed as Most Stable

With 58% of respondents' votes, the U.S. remains the country considered the most stable for real estate investment. Germany again took second place with 20% of the votes, and Canada remained in third place with 12%. The U.K. moved into fourth from fifth, while Australia fell from fourth to fifth. Eighty-six percent of respondents say they plan to maintain or increase their investment in U.S. real estate in 2018.

The survey also ranked the U.S. as offering the best opportunity for capital appreciation, followed by Brazil, remaining in second place. China and Spain both moved up from a sixth-place tie last year, taking third and fourth places respectively. The UK fell from third to fifth place.

At the same time, members are cautious, expressing concerns about where the industry is in the typical real estate cycle. They cited concerns about interest rate risks, high valuations, the impact of emerging technologies on retail and other property sectors, oversupply in some markets and property types, and possible economic and political missteps which could affect real estate by triggering an economic slowdown or disruption in the financial markets.

Ranking of US Property Types

Industrial (#1 last year)

Multifamily (#2 last year)

Office (#3 last year)

Hotel (#5 last year)

Retail (#4 last year)

AFIRE members are among the largest international institutional real estate investors in the world and have an estimated $2 trillion or more in real estate assets under management globally. The 26th annual survey was conducted in the fourth quarter of 2017 by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business.

Sears Closing Another 103 Stores

JANUARY 04, 2018

By Mark Heschmeyer

Struggling Retailer Continues Shuttering Unprofitable Kmarts, Sears

Like the retail version of the movie Groundhog Day, Sears Holdings is starting out 2018 the same way it started out 2017. Four days into the new year, Sears just announced the closing of 103 stores. Last year on this date it announced 150 store closings.

The retailer said it will close 64 Kmart stores and 39 Sears stores by early April, leaving it with about 875 locations.

Sears said it will continue right sizing its store footprint in number and size and close unprofitable stores in favor of investing more in its digital capabilities. The company informed store employees at the stores slated for closure that it will be closing them between early March and early April. Liquidation sales will begin as early as Jan. 12.

Head of the Class: CPPIB, GIC and Scion Acquire 24 Student Housing Properties for $1.1 Billion

JANUARY 03, 2018

Scion Student Communities, a student housing investment group that includes the Canada Pension Plan Investment Board (CPPIB), GIC and The Scion Group LLC, has acquired a U.S. student housing portfolio for $1.1 billion, or about $80,500/bed.

The investment group is buying 22 properties from affiliates of Harrison Street Real Estate Capital. The deal also includes the recapitalization of two student-housing communities previously owned by Scion-affiliated private syndications.

Chicago-based Harrison Street Real Estate had assembled its 22 dormitories in the portfolio over the past several years mainly through one-off transactions across five of its different investment funds.

The entire portfolio consists of 24 assets located in 20 different university markets across the country comprising 13,666 beds. The portfolio includes a mix of recently developed rental housing as well as some value-added assets, CPPIB said in announcing the deal.

"This is a compelling investment opportunity to efficiently build further scale in the U.S. student housing sector with a portfolio of high-quality, well-located properties in new and existing joint venture markets," said Hilary Spann, managing director, head of Americas, real estate investments, CPPIB.

"We believe the secular strength of the U.S. student housing sector will continue to deliver attractive, risk-adjusted returns for the CPP Fund, and we look forward to continue growing the joint venture with GIC and Scion," added Spann.

Scion president Robert Bronstein called the transaction "particularly strategic" given the joint venture was adding six properties in markets in which it already owns other student housing properties.

Since its inception in January 2016, the joint venture known as Scion Student Communities has completed over $4 billion of investments, primarily through four portfolio transactions, deploying $1.4 billion in equity capital. CPPIB and GIC each own a 45% interest in the newly acquired portfolio and Scion owns the remaining 10%.

The joint venture's national portfolio now includes 73 student housing communities in 52 top-tier university markets, comprising 46,555 beds. The average effective age of the portfolio is less than five years and over 70% of the assets are located within one mile of their respective campuses.

This was the second student housing portfolio in the past year that Harrison Street has sold to the CPPIB/GIC/Scion joint venture. Last March, it sold nine student housing properties to Scion Student Communities for $465 million.

Harrison Street is still one of the largest private investors in the student housing market with over 73,000 beds throughout the U.S. and Europe. It also invests in medical office properties, senior housing communities and self-storage facilities.

Christopher Merrill, co-founder, president and CEO of Harrison Street, said the portfolio sale reflects its strategy of acquiring single student housing assets or development opportunities located near large universities, increasing tenancy and packaging them for sale to other investors.

For IRET, the sale was a major milestone as the final disposition in its goal to refocus as a multifamily company. It plans to deploy proceeds from the MOB portfolio sale to acquire multifamily properties in the Twin Cities and Denver.

DECEMBER 20, 2017

Unibail-Rodamco has offered handsome price of $16 billion for Westfield Group, in part to land such attractive U.S. assets as the $1.5 billion Westfield WTC mall adjacent to the 911 Memorial in Lower Manhattan shown here

Paris-based Unibail-Rodamco's agreement to acquire Westfield Corp. for $15.8 billion in cash and stock has emerged as a potential turning point for the U.S. mall sector as Wall Street struggles to assess the implications of a flurry of mall and shopping center buyout and spin-off reports which has helped boost shares of mall REITs as much as 37% in recent weeks.

The proposed Unibail-Rodamco/Westfield pairing, coming on the heels of reports that GGP, Inc. (NYSE: GGP) turned down a $15 billion buyout offer but remains in merger talks with major shareholder Brookfield Property Partners, and the sharp lift in mall share prices over the past six weeks, has created a groundswell of positive sentiment for the mall sector over the past week.

The shift in sentiment suggests that high-quality malls remain a profitable play for prominent and well-heeled investors, despite the high-profile retail chain bankruptcies and the thousands of stores expected to go dark in coming months as e-commerce and changing consumer buying behavior continue to disrupt brick-and-mortar shopping centers.

Media outlets have reported recently that Taubman Centers (NYSE: TCO) and Macerich Co. (NYSE: MAC) may again be subject to takeover efforts, possible by the world's largest mall owner, Simon Property Group (NYSE: SPG), which made a $16.6 billion bid for Macerich in 2015 which was rejected by MAC's board of directors.

Other mall and shopping center operators are pursuing a spin-off strategy to improve their portfolios and bolster share prices, including DDR, Inc. (NYSE: DDR), which announced plans earlier this year to dispose of $900 million in properties and last week announced plans to spin off its non-core assets into a separate publicly traded REIT, Retail Value Trust.

"We certainly could see more consolidation in the space, given the recent activity and continued disruption," said Matt Kopsky, REIT analyst for Edward Jones. "There are synergies to scale with improving tenant relationships and better access to capital. We wouldn’t rule Simon out as a potential consolidator."

While Simon is viewed as being unlikely to enter the fray in the GGP/Brookfield talks, there's a small chance the huge mall and outlet center owner could pick off certain assets from GGP," Kopsky said.

"We'll see if and when there are some fireworks in the mall space," Kopsky said.

Consolidators, Activists See Unibail Deal as Trigger

The Westfield deal, which would make Unibail-Rodamco the second-largest mall operator behind Simon with 104 centers in 13 countries, is "very positive for the U.S. mall space overall" given a lack of price discovery due to the very few number of deals negotiated for high-quality properties in recent years, Kopsky said. The capitalization rate for the Westfield deal appears to be in the mid-high 4% range, compared with the initial offer for GGP by Brookfield, which was in the high 5% or low 6% range, he added.

"When the initial Brookfield offer came in at a less favorable price than many had hoped, some of the market's fears became reality," Kopsky said. "However, the Westfield deal certainly alleviated some of those fears and provides some good support for Class A malls."

Land & Buildings founder and chief investment officer Jonathan Litt, who along with Paul Singer's Elliott Management have led hedge fund efforts this year to take Taubman private or spin off some of the company's assets, this week cited the Unibail-Rodamco deal as "just the latest data point highlighting the severe discount that Taubman trades at relative to the underlying asset value."

"Opportunistic buyers are taking advantage of extreme discounts at publicly traded retail real estate companies," Litt said in a presentation released Tuesday. "The announced $25 billion sale of high-quality mall company Westfield Corp. is the latest transaction highlighting deep value in the sector."

In fact, Litt argues that Taubman merits an even higher valuation than Westfield given its superior sales productivity, exposure to malls with sales over $800 per square foot, and 30% higher concentration of Class A assets as a percentage of net operating income.

The reports have definitely jump-started mall REIT shares. GGP shares have increased nearly 25% in the wake of the reports since falling to a year low of $19 on Nov. 6. Stock prices for Macerich and Taubman have increased 23% and 37%, respectively, during the same period.

Investor Sentiment for Malls Hanging in Balance

While the recent rally by mall companies has been cause for investor optimism, some analysts caution that the round of merger and acquisition activity that investors appear to expect may not materialize.

"Success is not a given," and completing deals at prices that exceed current market valuations "may be easier said than done," Morgan Stanley equity analyst Richard Hill noted in a recent report. "We believe this a critical but untested crossroads for mall REITs."

On one hand, success in selling or privatizing higher quality mall REITs could demonstrate that mall stock prices have finally bottomed and are beginning to turn around after years of stagnation. Morgan Stanley's Hill said the buyout activity "couldn't have come at a better time" as malls may finally be due for a rally with share prices falling to a six-year low. Many stronger retailers are reporting better-than-expected earnings in spite of bankruptcy and closure announcements by department stores and apparel chains.

"There is certainly no guarantee that anything will happen, but sentiment is improving given the Westfield-Unibail deal, activist investors, and optimism that 2018 will not be as bad as 2017 in terms of retailer store closing and bankruptcies," Kopsky agreed.

If current M&A deals fall through or close at lower-than-expected prices, however, investors may see continued erosion in growth prospects and valuations, with share prices falling even lower, Hill noted.

According to an analysis of past merger and acquisition activity by Hill and his Morgan Stanley team, merger deals in the broader REIT sector have historically succeeded at share prices near the takeover target's 52-week high. However, mall REIT shares before the rally traded at 15% to 40% below their year highs,

Recent comments by retail real estate executives at the recent NAREIT annual conference suggested "there may be a disconnect between [the seller's] ask and the market's bid for malls given the current retail environment," Hill said.

The surprise $24.7 billion bid for Westfield, owner of high-profile properties around the country such as Westfield WTC in Lower Manhattan, Horton Plaza and UTC in San Diego and Century City mall in Los Angeles was nearly 18% above Westfield's share price as Unibail pays a princely sum in the view of some analysts to gain a foothold in the U.S.

Unibail CFO Jaap Tonckens addressed the bid pricing in a presentation on the sale last week.

"Based on our preliminary calculations, we're buying [Westfield] at an approximately 6% premium to our estimate of their NAV, so overall, this makes sense," Tonckens said, noting that the pricing is "well within the range" of other proposed transactions around the world, including Brookfield's reported offer for GGP.

As mentioned, Simon Property Group has previously attempted to buy both Taubman and Macerich. Activist investors Third Point and Starboard Value last month reported a stake in Macerich in a potential prelude to a buyout.

Rating Agencies Offer Differing Mall Outlooks

A Nov. 30 study by S&P Global Ratings suggests that investors still see value in U.S. retail, with the low U.S. unemployment rate helping bolster the mall sector in the face of other variables, such as the growing competition from e-commerce.

S&P said while retail collateral exposure in CMBS transactions clearly shows the potential for extreme default and loss rates among malls, "we still see the inclusion of this property type as helpful to diversifying multi-loan pools as long as the properties are underwritten based on an evaluation of their location, competitive landscape, and long-term performance trends."

Well-located brick-and-mortar stores within shopping centers and freestanding properties in areas with strong demographics are usually competitive and should continue to perform well. However, "the need to focus on local market analysis, competitive positioning and performance trends of each property is clear," S&P said.

"Highly productive assets, including A-rated malls and high street retail, have been commanding cap rates roughly 40-50 basis points below what comparable properties would trade for during the peak of the last cycle," McCullough said. "Yet investors are demanding higher returns on weaker product, which include C malls and exurban retail trade areas. The cap rate curve is therefore steeper in 2017 than at any point this decade, which is emblematic of a bifurcated market."

Morningstar equity analyst Brad Schwer has taken a more bearish view on malls, arguing that the rise of e-commerce has hit malls hard and "the pain has just begun."

Although online accounts for only 10% of total retail sales, this percentage is climbing at a double-digit pace annually, softening demand for physical store space.

"While we believe retailers desire a storefront presence to interact with customers and display and market their brands, we see malls taking a significant hit in an already over-retailed environment," said Schwer, who recently reduced value estimates for Simon, Macerich and GGP.

"Our uncertainty surrounding the physical retail environment is too high to award an economic moat," Schwer said. "We see a diminishing network effect as retailers shift strategies and place less emphasis on physical storefronts."

"Mall landlords believe they can revitalize the shopping experience with lofty redevelopments, but this approach is highly capital-intensive and also carries great uncertainty, making it a risky endeavor," Schwer said. "With the U.S. massively over-retailed as it is, we think the industry as a whole will have a tough road ahead."

DECEMBER 14, 2017

By Mark Heschmeyer

Traditional Drugstore Model Focused on General Merchandise with Pharmacy Counter May Give Way to Reimagined Health Care Hub

Last week's blockbuster deal in which CVS Health (NYSE: CVS) agreed to acquire Aetna Inc. (NYSE: AET) for $77 billion, including assumption of debt, has the potential not only to fundamentally alter the health plan market but also radically reshape the retail and health care real estate markets.

With about $245 billion in combined revenue and around $19 billion in combined EBITDA, CVS and Aetna are banking on the potential to redefine the way individuals access health care services in lower-cost, retail/pharmacy locations. Aisles of greeting cards and soft drinks could eventually make room for wellness treatments, clinical and pharmacy services, vision and hearing testing, as well as the expected nutrition, beauty and medical equipment offerings.

CVS Health's current network includes more than 9,700 CVS Pharmacy locations and 1,100 MinuteClinic walk-in clinics. In addition, CVS Health has more than 4,000 nursing professionals on staff providing in-clinic and home-based care across the nation.

Aetna is a leading diversified health care benefits company, insuring 22 million people and providing services to an estimated 44.6 million people in other ways.

At the heart of the combination is a business proposition to address the growing cost of delivering health care services by reducing check-ups and other "between" doctor visits through face-to-face counseling at a store-based health hub.

"These types of interventions are things that the traditional health care system could be doing," noted Larry J. Merlo, CVS Health president and CEO. "But the traditional health care system lacks the key elements of convenience and coordination that help to engage consumers in their health. That's what the combination of CVS Health and Aetna will deliver."

One of the proposed merger's goals is to deliver more health care services in CVS stores and its retail clinics, shifting the traditional health care delivery model further away from more costly settings, including urgent care centers, doctor offices and hospital emergency rooms.

This shift has been ongoing but could accelerate following the CVS-Aetna merger. CVS has been transitioning space in its stores for the last two years, adding such things as vision and audiology centers.

"There's no question that we have the opportunities to repurpose some of the space in our stores," Merlo said. "You can think about this as more of a hub-and-spoke model in that there will be a core set of services that would be available broadly, and there likely would be a subset of stores that would have enhanced services. And that delta would certainly be reflected in the space allocation within the store. But, obviously, we'll have a lot more to say about that as we get these pilots underway and go from there."

With its deal to acquire Aetna, CVS could further sharpen its focus on making health care its core business, said Brian McDonagh, a director with CBX Brand Strategy in Minneapolis.

"For far too long, U.S. chain drugstores have suffered from a bit of an identity crisis," McDonagh said. "Despite the coolers and front-of-the-store merchandise, CVS, for one, has realized that it isn't primarily a food seller, nor is it a discount retailer or c-store. Increasingly, CVS has been trying to act like a health care company."

Real Estate Industry Paying Close Attention

As CVS begins to remake its retail pharmacy stores to become a new "front door" to a fragmented health care system, real estate investors will need to pay close attention to both near- and long-term consequences of the combination, said Quinn McCarthy, an analyst with JLL Capital Markets, Net Lease.

"In the short-term, I expect the acquisition to give many risk-averse net lease investors pause regarding CVS-leased assets," McCarthy said. "CVS will almost inevitably experience a multi-notch credit downgrade as a result of the acquisition cost, and will also see their EPS diluted significantly. The other risk that stands out to me is the future viability of current CVS locations."

Without knowing how CVS intends to physically implement the expanding health services arm of its business, leases approaching expiration of the initial term may be approached with a significant discount until the future of CVS's prototype is known, McCarthy said.

"If it is revealed that they intend to reduce retail floor area in existing stores to add dedicated health service space, this worry will likely be assuaged. But the risk of a fundamentally different new prototype making existing layouts obsolete will be a common investor worry," McCarthy said.

However, over the long-term, assuming successful implementation by CVS, McCarthy said he can see the merger boosting net lease investors' interests in CVS as a tenant.

Milt Charbonneau, a senior director at Cushman & Wakefield in Iselin, NJ, sees any growth in health care shifting to more conveniently located retail space as a downside worry for investors in medical office buildings. Charbonneau said the concern would be even more if other retailers, such as Walmart and Walgreens, expand their health care offerings in a similar fashion.

"The CVS/Aetna deal may be the start of 'the department store of health care,' said Mike Polachek, executive vice president at SRS Real Estate Partners. "In addition to their fleet of retail stores, I could see them opening selective stores in former large boxes and housing, in addition to their retail format adding an insurance office, urgent care (without overnight) stays, physical rehab, concierge doctors and other medical providers. They could form a hub-and-spoke distribution with the hub being these large format operations and the retail stores being the spokes."

Defending Against an Amazon Incursion

Tony Miller, owner of The Miller Family Cos. in Agoura Hills, CA, said the merger is clearly a defensive play to the expected entrance into the pharmaceutical field by Amazon, offering steeply discounted prescription drugs via mail order.

"By combining forces, the newly formed entity could offer 'in-store' medical care, creating a one-stop shop for medical needs. I am not sure how Amazon would compete with the human interaction a medical staff offers," Miller said.

But the potential Amazon incursion is just enough of a worry that major investors are already adjusting their pharmacy holdings. Agree Realty Corp (NYSE:ADC) said last month that it reduced its net leased pharmacy holdings from 30% to 13.2% in the last three years. Walgreens, Agree's largest tenant, has been taken down to 8.5% from 22% in that time.

"We're committed to taking Walgreens down to sub-5%, not because we don't believe in the tenant or the business, but we think it's the right thing to do to divest and redeploy on an accretive basis there, and you'll continue to see that trajectory," said Joey Agree, president and CEO of Agree Realty.

"While we remain believers in the pharmacy space, I will tell all investors just to [compare] what we've accomplished to their diversification efforts," Agree said. "It's one thing for Amazon if and when they do enter the pharmacy space to enter it and disrupt it. It's another thing for them to operationally affect the Walgreens and CVS's of the world. So we haven't seen those rumors trickle down. What we have seen is just generally a continued flight to safety. And frankly, people have gotten in line behind the strategy, which we've been expounding upon since 2011 in terms of e-commerce."

Unibail-Rodamco Buying Westfield in $25 Billion Deal

DECEMBER 14, 2017

Unibail-Rodamco SE has agreed to acquire Westfield Corp. in a deal valued at US$24.7 billion, creating one of the world's largest shopping center developers and operators.

Under the terms of the agreement, security holders of Sydney, Australia-based Westfield will receive a combination of cash and shares in Paris-based Unibail-Rodamco, valuing each Westfield security at US$7.55 and representing a premium of 17.8% to Westfield's closing security price on Dec. 11, 2017. The deal implies an enterprise value for Westfield of US$24.7 billion.

The transaction has been unanimously recommended by Westfield's board of directors and Unibail-Rodamco's supervisory board.

Unibail-Rodamco said a combination with Westfield is a "natural extension" of its strategy to own and operate high quality large shopping destinations in wealthy capital cities. The acquisition will mark Unibail-Rodamco's entry into the U.S. market.

The merger will create a global retail property leader with US$72 billion of gross market value. The combined entities will own a platform of 104 retail centers across 27 European and U.S. markets. About 22% of its holdings by gross market value will be in the U.S. with properties in Seattle, San Francisco, Southern California, Chicago, New York and Annapolis.

The portfolio includes malls in such cities as London, Los Angeles, Munich, New York, Paris, San Francisco, San Jose, Stockholm, Vienna, Madrid and Warsaw. Net rental income was approximately US$2.6 billion for the 12 months ended June 30, 2017.

The combined firms development pipelines totals about US$13 billion, with developments in London, Milan, Hamburg, Brussels, Paris, San Jose, Lyon and other cities.

Unibail-Rodamco has earmarked approximately U.S. $3.5 billion of the 104 assets to be disposed over the next several years.

Christophe Cuvillier, chairman and CEO of Unibail-Rodamco, will be the group CEO, and Colin Dyer, chairman of Unibail-Rodamco's Supervisory Board, will be the group chairman.

"All of us at Unibail-Rodamco have immense respect for what the Lowy family and the Westfield team have accomplished with the Westfield brand and the company’s iconic collection of world class shopping destinations," Christophe Cuvillier, chairman of the Management Board and CEO of Unibail-Rodamco said in a statement announcing the agreement. "We believe that this transaction represents a compelling opportunity for both companies to realize benefits not available to each company on a standalone basis, and creates a strong and attractive platform for future growth."

The group will have its headquarters in Paris and Schiphol (Netherlands), with two regional headquarters in Los Angeles and London, and will retain its status as a Dutch REIT.

Deutsche Bank and Goldman Sachs are providing US$7.2 billion in committed acquisition financing facility to cover the cash portion of the offer, refinancing requirements at Westfield and Unibail-Rodamco and transaction costs.

The amount of funds raised by non-traded REITs is expected to hit a 15-year low for 2017 amid increased federal regulatory scrutiny and pressure on companies to reduce their fee structures and increase transparency into their operations.

At least two large sponsors of nonlisted trusts have exited the space in recent months. W. P. Carey Inc. (NYSE: WPC), a major player which had sponsored non-traded REITs since 1990, decided to exit the business in June. In a similar move to focus on its real estate portfolio, net-lease operator VEREIT, Inc. (NYSE: VER) agreed to sell its Cole Capital nonlisted REIT operator to an affiliate of Los Angeles-based CIM Group, Inc. in a transaction valued at up to $200 million.

Non-traded REIT fundraising will end 2017 at $4.2 billion, a nearly 79% plunge from the $19.6 billion raised during the sector's 2013 peak, according to sector consulting firm Robert A. Stanger & Co. Nearly half that total, about $2 billion, will be generated by just one player, Blackstone Group's nascent Blackstone REIT, which began trading this year.

However, Stanger and other analysts see a rebound in the future. The recent arrivals of Blackstone, Starwood Capital Group and other global investment institutions and money managers such as Cantor Fitzgerald, paired with the growing appetite for yield among smaller retail investors and major funds alike, may boost the fortunes of the non-traded REITs in 2018.

Cantor Fitzgerald LP this week announced plans to launch Rodin Income Trust, its second non-traded REIT, with a goal of raising up to $1.25 billion to acquire CRE debt, securities and properties. In October, Starwood Capital Group became the latest major player to test the waters, announcing plans to launch Miami Beach-based Starwood Real Estate Income Trust, Inc., hoping to raise up to $5 billion through an initial public offering for the REIT and use the proceeds to acquire property and debt in the U.S and globally.

Stanger forecasts a more-than 33% increase in fundraising by non-traded REITs next year to approximately $5.6 billion, pointing to the acceptance of the formerly maligned non-traded REIT sector by big institutional players and the broader financial community as investors search all corners of the market for yield opportunities.

Kevin T. Gannon, managing director with Robert A. Stanger & Co., said the turnaround may be part of a strategy by Blackstone, Starwood and other major players to use non-traded REITs as a vehicle for pooling individual retail investors who buy securities on their own account rather than on behalf of large institutions.

The Starwood IPO follows the formation of Blackstone Group's first non-traded REIT, Blackstone Real Estate Income Trust, which has already exceeded its goal of raising more than $1.4 billion this year.

"Blackstone has been dominating the space with its institutional cachet and long-term relationships with the wire houses, who have been a significant force in non-traded REIT fundraising in the last two years," Gannon said. "This year, the wire houses have been an important factor through their business with Blackstone, and in prior years, through their fundraising through Jones Lang LaSalle."

Non-traded REITs have also been active sellers. Griffin Capital Essential Asset REIT, Inc. late last month sold DreamWorks Animation’s headquarters and studio campus, a five-building, 460,000 square foot property in Glendale, CA, for $290 million. The REIT acquired the building in July 2015 for $215 million.

Other important non-traded REIT players this year have been Carter Validus in the data center and health-care asset space, Cole Capital in the net lease sector, and Black Creek and Smartstop in industrial and self-storage properties, respectively, according to Stanger.

Los Angeles-based CIM Group agreed to acquire nonlisted REIT operator Cole Capital from net-lease operator VEREIT, Inc. (NYSE: VER) in a transaction valued at up to $200 million, a price that "seems light" compared with JMP Securities' estimated $260 million valuation of the platform, according to JMP Securities analyst Mitch Germain in a note to investors.

The non-traded industry has faced considerable challenges associated with the Department of Labor's new fiduciary rule and increased transparency, which have inhibited fundraising, Germain said, noting that full-year projections for 2017 are well below five-year averages for the industry.

CIM said it plans to grow Cole's assets under management and expects to gain broader distribution of the non-traded REITs it sponsor through its broker-dealer agreements.

Once Poised to Become Third-Largest U.S. Pharmacy, Fred's Now Shrinking

DECEMBER 7, 2017

By Mark Heschmeyer

Weakening Sales Prompts Review of Owned Real Estate as Part of Turnaround Strategy

It was just a year ago this month, when Fred's Inc. (NASDAQ:FRED) struck a deal to buy 865 Rite Aid stores for $950 million putting it on the cusp of becoming the third-largest drug store chain in the country.

The deal was contingent on Walgreens Boots Alliance's (NASDAQ: WBA) winning federal approval for its proposed acquisition of and Rite Aid Corp. (NYSE: RAD). But that merger never went through as planned and neither did Fred's acquisition.

Now this week, Fred's has cancelled its quarterly cash dividend in order to retain free cash flow for debt reductions. It also said it is putting some of its real estate up for sale.

For the third quarter, Fred's recorded a net loss of $51.8 million compared to a net loss of $38.4 million for the third quarter of 2016.

To help stem the losses, the company's focus is turning towards driving increased traffic, and reducing expenses. Its board is considering alternatives for certain non-core assets, including real estate and its specialty pharmacy business. The board's decision to consider these strategic alternatives is not in response to any third-party proposal, the company said.

Tracing its history back to an original store in Coldwater, MS, opened in 1947, today Fred's operates approximately 600 general merchandise and pharmacy stores, including 88 owned facilities.

"In the third quarter, we furthered our efforts to turn around the company, and we are encouraged by our positive front store comp sales in both October and November," said Michael K. Bloom, CEO of Fred's. "We are focused on driving traffic, reducing SG&A, generating free cash flow and lowering our debt. We are aggressively executing our turnaround strategy to accomplish these goals, and we are seeing traction in both front store and pharmacy."

Net sales for the third quarter were $493.6 million, down 4.5% from $516.6 million in the same period last year mainly driven by the closure or 39 underperforming stores earlier in 2017. Comparable store sales for the third quarter declined 0.8% versus a decrease of 3.8% in the third quarter last year.

The top 1,000 corporate, government and institutional occupiers in the U.S. hold leases worth an aggregated rent value of more than $135 billion, encompassing just over 8.4 billion square feet of office, industrial and flex space across about 115,500 properties, according to a recent analysis of CoStar Group tenant data.

The study ranks occupiers by the current value of rents paid across their U.S. real estate portfolios in CoStar's database. Total rent value was calculated by multiplying the space occupied by tenants in each building by the estimated rent value per property in the U.S. and providing a total lease value for each occupier across markets.

Of the top 1,000, Amazon.com had the highest overall rent value relative to its occupied square footage, with a total $1.34 billion in rent value across 352 U.S. properties totaling more than 130 million square feet of industrial, office and flex space. Amazon controls large blocks of office space in Manhattan, San Francisco and its headquarters city of Seattle, among other markets.

The high dollar value of the internet retailer's lease obligations can be attributed to its robust absorption of office space in recent years, along with its growing network of hundreds of fulfillment, customer service and other distribution facilities. For purposes of the study, which did not include retail properties, Amazon has also broadened its property footprint with the non-grocery assets in its June acquisition of Austin-based Whole Foods Market, Inc. Amazon occupancy is sure to grow even larger in coming years with the anticipated announcement of the site for its proposed $5 billion HQ2 corporate headquarters campus, which will have capacity for 50,000 employees and 8 million square feet.

The internet seller's request for proposals (RFP) announcement set off arguably the largest economic development and business attraction scramble in modern corporate history last summer, with Amazon revealing that it received proposals from 238 cities and regions across 54 states, provinces, and local or regional jurisdictions throughout North America. Rumors are swirling that Amazon will soon announce the short list of contenders or even the winning city.

The study was directed by CoStar Senior Research Director Corey Durant, Senior Vice President of Technology Jason Butler and Senior VP of Global Research Lisa Ruggles. CoStar's analytics team contributed data on the estimated rent value per property for U.S. office, industrial and flex properties.

Durant said the results were eye opening and in some cases, surprising.

"The number of banks and tech companies among the largest rent payers was revealing," Durant said. "Who would have thought the Dept. of Justice would have the fourth-highest rent value among the 1,000 largest tenants? Amazon, Apple, Google and Microsoft were all near the top as one might expect. However, DaVita Healthcare, with its network of dialysis treatment centers stood out as a definite riser at #21," Durant added.

Other significant findings in the study included the high rent value contributed by federal government agencies and other state, local and regional jurisdictions. Of the top 25 occupiers in total rent value, the U.S. Dept. of Justice ranked just behind Wells Fargo at #4, representing total rent value of $822 million in more than 850 facilities totaling 24.5 million square feet.

After Amazon, the #2 and #3 spots are held by two of the nation's largest banks, Bank of America and Wells Fargo. Other financial institutions in the top 25 include JPMorgan Chase, Morgan Stanley, Citigroup and the U.S. Treasury Dept., which occupies nearly 300 properties for a total of nearly 13.5 million square feet with a rent value of about $347 million, ranking #22 among the top 1,000 occupiers.

State Farm Insurance had the largest number of properties among the top 1,000 occupiers, 9,654 properties totaling 25.6 million square feet, and total rent value of just under $500 million, ranking #10 in the top 1,000 with rent value of about $498.6 million.

Tech companies were strongly represented among the rent value leaders, with their offices and other facilities concentrated in the priciest submarkets of top gateway metros with the nation's highest average office rental rates such as Manhattan, San Francisco, Silicon Valley, Boston, Los Angeles and Seattle.

Alphabet, Inc., the multinational conglomerate formed in a 2015 corporate restructuring of Mountain View, CA-based Google and the world's second-largest internet company by revenue behind Amazon, ranked #8 in rent value with its nearly 12.5 million square feet of occupied space. Other tech companies with fast-growing footprints such as Microsoft and Apple were also in the top 25.

Other data points of note in the survey included the following:

Shared-office space leaders Regus and WeWork ranked #9 and #26, respectively in rent value. Regus spaces have a rent value of $501.6 million in 13.7 million square feet at about 560 properties. New York City based WeWork, which provides shared workspaces, tech startup subculture communities and services for entrepreneurs, freelancers and small businesses, controls nearly 6 million square feet of U.S. office space at nearly 100 locations. The company founded in 2010 has among the fastest-growing valuations in American corporate history at more than $20 billion.

Federal agencies led by the Justice Dept. (#4), US General Services Administration (#7), U.S. Department of Homeland Security (#13), Social Security Administration (#22), Treasury Department (#22) and Health & Human Services at #24 held almost one-quarter of the top 25 occupiers.

Boeing Co. (#12) and Ford Motor Co. (#16) were the only manufacturers to make the top 25.

Editor's note: This update conforms several of the rankings in the text of the article with the correct rankings in the chart above.

Major Apt. Developers Disclose Plans to Slow Pipelines as Multifamily Deliveries Expected to Peak Next Year

NOVEMBER 16, 2017

By Randyl Drummer

Slowing Current Development Pace Could Help Avoid Overbuilding and Extend Rise in Values, Rents in Multifamily Sector

One of the largest projects of next year will be the mid-2018 groundbreaking of the 1.15 million-square-foot second phase of Washington, D.C.'s The Wharf by PN Hoffman and Madison Marquette, including residential, office, marina and retail space.

In a reversal of current development trends that could help extend the run of increasing property values and rents in the multifamily sector, executives for several of the largest publicly traded apartment owners and developers said they are planning to trim back their construction pipelines in coming quarters.

UDR, Inc. said its development pipeline would end 2017 at a little over $800 million, below the REIT's strategic range of $900 million to $1.4 billion. UDR Chief Investment Officer Harry Alcock said he expects that trend will continue through next year.

"We're actively looking to backfill for 2018 and 2019 starts, but my expectation is that given the opportunities, our pipeline will fall below the low end of that [range] for at least the next several quarters," Alcock said.

Timothy J. Naughton, CEO of AvalonBay Communities, Inc. (NYSE:AVB), also said he expects the developer's current $3.2 billion construction pipeline targeted for projects over the next three and a half years is "probably going to trail off a bit."

"Even though the cycle is going longer, the economics are less compelling and less deals are making it through the screen," Naughton said noting the impact of rising construction costs and flattening rental rates.

Wall Street has generally rewarded apartment REITs that have shifted from acquisitions to a development strategy so far in the expansion. However, the dialing back of planned starts suggests that developers are monitoring conditions closely and proceeding cautiously on new commitments in light of next year's projected peak in apartment deliveries.

Construction permits for new multifamily projects are expected to decrease in 2018 while office, retail, logistics and hotel construction starts will rise a modest 2%, continuing a deceleration from the sharp 21% hike in 2016, which signaled the cycle's peak year for commercial construction, according to the 2018 Dodge Construction Outlook.

"We're still seeing a slowdown both in terms of starts and deliveries in our markets, which has more than to with the overall tightening of money for developers and shortage of qualified construction workers," said John Williams, chairman and CEO of Preferred Apartment Communities, Inc. (NYSE:APTS).

Dodge forecasts that apartment and other multifamily housing starts will decline by 11%, or 425,000 units next year and retreat 8% in total construction spending volume. Apartment rent growth, occupancy and other fundamentals began to pull back slightly this year from the property type's 2016 peak amid concerns of oversupply in some markets and a more cautious lending stance by banks.

While future new apartment construction is projected to decline, the current supply wave has yet to crest. CoStar Portfolio Strategy's forecast calls for new apartment deliveries to peak in 2018, with more than 700,000 units added to stock over the next three years, averaging more than 50,000 per quarter.

Those totals, while the highest seen in a decade, still fall well below the supply booms of the 1960s through the 1980s during the height of the baby boom, when developers completed an average of more than 100,000 units per quarter. Michael Cohen, CoStar director of advisory services, noted there is more than enough renter demand to fill 50,000 new units each quarter.

"Outside of a few select markets such as Austin, Nashville and Washington, DC, the supply wave isn't having a dramatic effect on broader U.S. fundamentals," Cohen said during the company's latest multifamily update and forecast.

While several project types, including multifamily housing and hotels, have pulled back from their 2016 levels, the current year has seen continued growth by single-family housing, office buildings and warehouses, said Robert Murray, chief economist for Dodge Data & Analytics.

The institutional segment of nonresidential building has been strong this year, led by transportation terminal projects and gains in school and health care facility construction, Murray added. Residential building is forecast to rise 4%, with nonresidential building up 2%.

NOVEMBER 9, 2017

By Randyl Drummer

Record Levels of Store Closures Could have Healing Effect as Weakest Centers Shut Down or Get Repurposed

Developers of mixed-use projects such as Sunnyvale Town Center in Silicon Valley, which will include 900,000 square feet of new shopping space, are hoping to tap into continued demand for newer high-end retail properties.

The U.S. national retail vacancy rate ticked up 10 basis points for the second consecutive quarter to reach 5.2% in the third quarter of 2017 as retail leasing and net absorption slowed despite continuing improvement in the broader economy and growing consumer spending power, according to CoStar analysts.

The slower leasing performance in the third quarter reflects the ongoing store closures announced by several major retailers. In total, retailers have announced a record 101 million square feet of store closings this year, on top of 83 million square feet of store space that went dark in 2016.

However, despite signs of decelerating leasing demand for the U.S. retail market, some analysts speculate that record levels of store closures will eventually have a 'healing effect' on the market as the weakest shopping centers shut down or are repurposed.

They argue that recent weakening of fundamentals does not necessarily justify the doomsday scenario suggested by gloomy headlines warning of a "retail apocalypse" or "Armageddon, and the focus on the ongoing purge masks the best-performing centers, many of which are adding stores and maintaining occupancy.

"Store closures have become a headline risk, and I think it is impacting the capital markets and pricing of retail property. But for shopping center owners and investors, these closures may be a necessary means to healing the market," observed CoStar director of U.S. retail research Suzanne Mulvee in presenting the latest quarterly data during CoStar's State of the Retail Market Q3 2017 Review and Outlook.

"Consumer spending (at the closed stores) needs to go somewhere, usually to another physical retailer, so we look at this trend as somewhat positive for the overall market," Mulvee said. Surviving stores in the right locations "will ultimately come through this period even stronger than before," added CoStar managing consultant Ryan McCullough.

One major issue contributing to concerns on Wall Street is the staggering amount of debt held by retail chains, incurred in part during the wave of leveraged buyouts by private-equity firms in recent years. For example, giant shoe retailer Payless Inc., which filed for Chapter 11 bankruptcy in April, incurred more than $700 million in new debt, including buyout borrowings, after being acquired in 2012 by Golden Gate Capital and Blum Capital Partners.

"If retailers cant refinance the debt at reasonable rates, they will be forced into bankruptcy, and that gives them cover to break leases," said Mulvee. "Capital is still positive on high-quality retail, but it is becoming even more bearish on weaker retail."

Looking Beyond Store Closures

"When we subtract those non-competitive malls with vacancies of 40% or higher, we see a far different picture," McCullough said. "It's the troubled properties that lose a key tenant and set into motion an exodus of defections," skewing the retail vacancy picture, he added.

U.S. retailers expect to open nearly 4,100 more stores than they will close in 2017, a conveniently overlooked fact in many news headlines focused chiefly on the number of store closings, according to "Decluttering the Retail Landscape," a recent report by TH Real Estate. Competition from online sales is pushing weaker retailers out of business faster than ever before, but the report posits that should ultimately result in a financially healthier and more adaptable set of retailers and shopping centers that provide more appealing experiences and a compelling product mix for shoppers.

The best-performing malls and shopping centers will continue to attract tenants and retain value. Average and lower-performing properties will continue lose value and eventually close or be repurposed, according to the report.

"Changes in retailing are in their early stages, yet doomsday scenarios splashed across news headlines are being extrapolated to the entire industry rather than to its most vulnerable segments," notes Melissa Reagan, head of Americas research for TH Real Estate. "While we expect online retail sales will continue to grow in the coming decades, we also believe consumers will value the experience of shopping in a physical store."

Manhattan retailers are beginning to get that message, as the long decline in retail rents appears to be leveling off and activity is beginning to pick up again, said Robin Abrams, vice chairman of retail and principal at Eastern Consolidated. Abrams heads the Abrams Retail Strategies group, which focuses on retail leasing and consulting.

Rental rates became overly aggressive by 2014 at a time when tenants were reporting spotty sales performance and more brands were competing for the same customer base, Abrams said.

"Where New York goes, so goes the country," she said. "Retailers now understand they need to have good product and give people a reason to come to their stores. Point of sale is most important, whether that's online or in the physical stores."

Landlords are now willing to lock in shorter terms and be more flexible and creative to accommodate tenants, and that is starting to induce deal making, Abrams said.

"There's not as much rent upside, but at least we have activity in the marketplace," Abrams said.

US Apartment Demand Bounces Back from Slow Down in Early 2017

NOVEMBER 3, 2017

By Randyl Drummer

Third Quarter Numbers Helping to Extend 'Golden Age of Multifamily'

Renter demand for apartments continued to accelerate in the third quarter of 2017 as the market absorbed more than 70,000 units and the overall national vacancy rate for U.S. apartments continued to trend lower after turning sharply up at the end of last year.

"The third quarter (vacancy) numbers are a welcome sign (for owners) after the sharp increase at the end of last year. Overall, it was a strong third quarter, which was a nice surprise," said Michael Cohen, CoStar director of advisory services, during this week's State of the Multifamily Market Q3 2017 Review and Outlook. "We're still in the golden age for multifamily, but we're seeing signs of a gradual slowdown in the apartment market."

Accounting for the slowing apartment market conditions is the gradual upward trend in the homeownership rate, which subtracts from the renter pool as millennials and other groups purchase single-family homes. The rate rose by 20 bps in the third quarter to 63.9%. A one-percentage point increase in the homeownership rate would subtract about 800,000 rental units from net absorption, Cohen said.

Slowing rent growth and sales transaction volume, paired with flattening prices for apartment properties, are also cutting into apartment fundamentals.

But don't blame overzealous developers. Despite blaring headlines about apartment oversupply in certain markets, the U.S. has been in a period of housing undersupply. While apartment construction remained at elevated levels during the quarter, overall inventory of new housing, including single-family homes and for-sale housing, remains near all-time lows.

"There's more than enough renter demand to fill 50,000 new units each quarter," Cohen said. "Outside of a few select markets such as Austin, Nashville and Washington, DC, the supply wave isn't having a dramatic effect on broader U.S. fundamentals."

Because of this relatively modulated level of new supply, some Wall Street analysts continue to favor apartment REITs that have shifted from an acquisition to a development strategy.

"We continue to favor development oriented multifamily REITs, as we like the concept of owning new, state-of-the-art assets in the correct locations at replacement cost," said John Guinee, REIT analyst for Stifel Nicholaus. "We see little risk in development of the right product in the right location."

Once supply of for-sale ramps up again, however, CoStar analysts believe affluent renters are more likely to wade back into the buying pool, especially in lower cost markets.

"For those looking to play the housing cycle, entry level condo or single-family homes represent attractive options, given some the shifts by millennials we're beginning to see and will continue to see for quite some time," Cohen said.

Executives for publicly traded multifamily REITs confirmed that while the fundamental case for apartments remains strong, rising supply will eventually increase competition among developers.

Terry Considine, chairman and CEO of Apartment Investment & Management Company (NYSE:AIV), told investors last week he's expecting the broader economy to continue its steady growth while demographics will support continued solid demand for apartments.

However, "competition from new supply will continue, although there will be rotation as to which submarkets are exposed," Considine said.

"We're still seeing a slowdown both in terms of starts and deliveries in our markets, which has more than to with the overall tightening of money for developers and [shortage of] qualified construction workers," noted John Williams, chairman and CEO of Preferred Apartment Communities, Inc. (NYSE:APTS).

Over the past year, some U.S. markets, such as Stamford, CT; Pittsburgh and Honolulu, have seen lower apartment vacancy, in most cases due to lower levels of new supply. Conversely, higher levels of new apartment construction in Austin, San Antonio, Denver as well as in several Florida markets, such as Fort Lauderdale and Orlando, have bumped up vacancy rates in those markets over the last 12 months.

Leasing activity flattened toward the end of the quarter, while rent growth remained positive but at a lower rate than the 2015 and 2016 peak levels, coming in at 2.4% in the third quarter of 2017. Sacramento led the nation in apartment rent growth at nearly 8%, which CoStar analysts conjectured was possibly a ripple effect from the affordability crisis in the San Francisco Bay area. Salt Lake City, Las Vegas, Phoenix, the Inland Empire and Orlando also logged strong apartment rent growth during the third quarter.

Daily rental rates in Houston jumped almost overnight in the wake of Hurricane Harvey, which removed thousands of units from apartment inventory while increasing demand from homeowners forced from their homes by flooding and storm damage.

NOVEMBER 3, 2017

By Mark Heschmeyer

Expense Reduction Viewed as Critical in Cutting Losses, Cash Burn

Beginning the week by fully tapping into what remained of an available $200 million line of credit, Sears Holding (NYSE:SHLD) closed the week by announcing that it will shutter another 63 stores before those borrowings come due next spring.

The company notified employees at 45 Kmart stores and 18 Sears stores that their stores will be closing in late January 2018 but will remain open during the holiday sales season.

The stores are located in 26 states with Pennsylvania and Ohio accounting for a combined 12 of them, including the BigK store in Austintown, OH (pictured).

S&P Global Ratings this week lowered Sears' credit rating deeper into junk territory from CCC+ to CCC. Sears Holdings Corp. has more than $1 billion of debt maturities in 2018.

"Although recent results have demonstrated some progress on cost reductions and the company has recently accessed new liquidity from related parties, we see addressing the 2018 third-party obligations, including about $717 million due June 30, 2018, under the term loan as critical to avoid a broader restructuring," S&P said.

"The outlook is negative," the ratings agency added. "We could lower the rating if we do not believe the company will make progress to address the mid-2018 maturities through a combination of asset sales or refinancing."

Sears' debt maturities are also significant in 2020, when more than $1 billion in loans are due.

"A turnaround depends on the company's progress with integrating its retail strategy and announced cost-reduction plan to reverse losses and cash use. We believe the company retains significant unencumbered real estate it can use to generate liquidity, as it continues to demonstrate. Still, progress in stabilizing sales and reversing earnings declines are also important to avoid an eventual restructuring," S&P noted.

OCTOBER 26, 2017

By Mark Heschmeyer

Stakeholders Moving More Capital into Largest Funds; More Money Seen Shifting to Higher Risk Strategies in Search of Yield

The amount of uncalled or undrawn real estate investment capital, or "dry powder," has grown to staggering levels. This increase has come at a time when the investment climate remains decidedly mixed, with top-quality assets in core markets commanding high valuations after a sustained up-cycle. As a result, investors are increasingly searching elsewhere for properties that offer potentially higher yields.

The effects are showing up in deal volume. The total dollar volume for real estate sales of $100 million or more was 19.5% lower in the first half of 2017 compared to the same period in 2016. However, the deal volume for properties at prices of $100 million or less was just 2.3% lower, according to CoStar COMPs data. Those trends were continuing in the third quarter.

Meanwhile according to Preqin, a leading source of information for the alternative assets industry, investors are finding it increasingly challenging to find attractive opportunities for allocating that raised capital, according to Oliver Senchal, head of real estate products for Preqin.

It is also disrupting the flow of new capital into existing investment funds.

"The largest alternative investment managers are reaping the benefits as investors continue to consolidate capital with firms that offer investment capacity and product diversity," Fitch Ratings managing director Meghan Neenan said after reviewing the latest capital-raising totals from Preqin.

Private equity giant Blackstone Group is typical of that trend.

Private real estate dry powder levels stand at $244 billion as of September 2017, according to Preqin data. North America-focused funds accounted for the largest proportion (60%) of that global total, standing at $147 billion.

Blackstone Group reported last week that its share of total funds available for real estate investment stands at $32.9 billion or almost one-fourth of the North American total. Most of that money (78%) has been raised in the last two years.

"This [trend] places pressure on less-stablished fund managers, who are facing greater competition for the remainder of investor commitments and will have to find ways to stand out from one another in order to attract capital," Preqin's Senchal said.

Institutional Funds Still Prefer CRE

Even as the volume of big real estate deals drops, CRE continues to attract more intitutional capital allocations. In fact, 2017 represents an important milestone in this regard, according to Hodes Weill & Associates and Cornell University's fifth annual Institutional Real Estate Allocations Monitor.

This year's survey revealed that for the first time, global institutional investors' average target allocation to real estate surpassed the 10% threshold.

Over the past five years, institutional portfolios have increased their exposure to real estate from 8.5% to 9.1% invested. This implies that real estate portfolios have increased by approximately $0.5 trillion in total value, through a combination of capital appreciation and new investments.

"Real estate has proven over time to be an important portfolio diversifier, producer of stable income and hedge against inflation, which is why it's no surprise that this strategic asset class now exceeds a target allocation of 10% in global institutional portfolios," said Douglas Weill, managing partner at Hodes Weill & Associates

Although real estate has enjoyed a steady uptick in target allocations, the report reveals the pace of target allocations is moderating. Approximately 22% of institutional investors surveyed indicated that they expect to increase their target allocations over the next 12 months, down from 30% in 2016.

"While exceeding the 10% threshold is a seminal moment, the steady growth in allocations to real estate that the industry has experienced over the years appears poised to decelerate in the near term," Weill said. "This is due primarily to waning investor confidence, a trend that we've seen grow increasingly stronger since we first began conducting the survey.

While higher-returning valued-add strategies remain the strong preference for institutions, 60% of those surveyed signaled an increased appetite for defensive debt and private credit strategies.

That is similar to what Preqin is seeing.

Real estate debt funds, which have rapidly risen in prominence in recent months, experienced a $4 billion increase in dry powder from June to September 2017, and are the fastest growing investment strategy this year in terms of fund-raising.

Opportunistic and value added funds continue to account for the largest amounts of industry dry powder, representing 41% and 24% respectively.

The amount of uncalled raised funds has decreased for both core/core-plus and distressed funds.

JLL's global capital markets group said one of the reason for the trends is that the large-scale investment opportunities just aren't as readily available today in the U.S. real estate market.

"There is a wide gap between the current-to-target allocations of funds into commercial real estate, and many remain below their intended investment levels," said Jonathan Geanakos, president, JLL's America's capital markets business.

"Supply fundamentals are generally in check, and thus core pricing remains elevated," Geanakos said. "This has pushed investors into riskier strategies and paralleled a continued increase in value-add fundraising. However, investors are being selective, disciplined and more conservative in underwriting. This is creating a competitive environment for deploying capital, spurring increased levels of less conventional deal structures and strategies in today's marketplace.

Gunnar Branson, the CEO of the National Association of Real Estate Investment Managers, concurred.

"There's a disconnect between capital demand for assets and real estate supply," Branson said. "That presents an interesting set of challenges for institutional real estate investment managers and their investor clients. The market today is pushing everyone to think deeper and go beyond the obvious deal. Reasonable, risk-adjusted returns are there for those investors able to take a creative, intelligent approach."

OCTOBER 26, 2017

While Gov. Chris Christie Defies Other States to Beat New Jersey's Financial Package, Other Regions Hope Amazon will Consider Quality of Life over Dollars and Cents

Under The Irvine Co.'s Spectrum Terrace proposal, Amazon would not be required to invest capital for land acquisition, buildings or entitlements.

mazon confirmed this week that 238 North American cities and regions submitted bids to be the home of its planned co-North American headquarters, dubbed Amazon HQ2.

In the U.S., bids were submitted by 43 states and Puerto Rico, only Hawaii, Montana, Wyoming, North and South Dakota, Vermont and Arkansas decided not to participate. Proposals also came from several cities in Canadian provinces ranging from Quebec to British Columbia, as well as three regions of Mexico: Chihuahua, Hidalgo and Querétaro.

Some cities that had planned to join in the competition, such as Little Rock, Arkansas, bowed out of the bidding because it didn't meet Amazon's minimum requirements even though it believed it offers what Amazon wants. However, that didn't deter even smaller cities such as Fall River, MA, from submitting bids.

The giant online retailer is seeking sites in major cities for a "full equal" to its Seattle headquarters and expects to invest more than $5 billion to build and operate its new co-headquarters, which it said could include as many as 50,000 high-paying jobs. In addition, Amazon said it expects its no co-headquarters to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community.

Most of the proposals showed a willingness to offer costly incentives to woo Amazon. Here is a sample extracted from official proposals to Amazon reviewed by CoStar, with summaries announced by localities.

Those incentives could go even higher as many of the localities said their terms were negotiable. Boston's offer also comes with unspecified amounts of tax abatements and Tax Increment Financing (TIF), as well as additional state funds.

Also various states have offered to include additional incentives of their own. For example, California is offering from $300 million to $1 billion more should any locality in the state be selected. Maryland's tax incentives were estimated to be in the billions of dollars.

Canada is backing its local bidders by offering $300 million to $500 million more of financial support.

In addition, the bids from various localities don't include separate individual site incentives being offered, such as free land and buildings, local tax incentives, and other more creative options. Missouri for example is offering to build a Hyperloop transportation system between Kansas City and St. Louis reducing a four-hour driving commute and 55-minute flight time to just 25 minutes.

But those additional incentives have a long way to go to top New Jersey which weighed in with by far the highest dollar offer backing just one location: Newark. To get Amazon there, the state is offering up to $7 billion in tax incentives. The state's bid includes $5 billion in tax incentives over 10 years following the creation of 50,000 new jobs with additional local incentives bringing the total incentive package to $7 billion in potential credits.

"In every competition there are winners and those who come close but dont win," NJ Gov. Chris Christie said. "Let any state go and try to beat that package along with what we have offered here in Newark."

While New Jersey and many other localities were offering the bank to Amazon, several others took a different approach.

Syracuse's proposal spelled it out right up front. "You Dont' Need Grants. You Need Efficiencies!" the proposal stated. "Incentives, no matter how robust or enticing, run out and what you are left with is the market realities of the location selected," before going on to tout the benefits of its central New York location.

Portland, OR, offered no incentives, instead focusing on its quality of life and the fact that it is one of the top three U.S. markets for attracting college graduates and the second for attracting tech workers out of the San Francisco Bay area.

Toronto's bid was accompanied by a letter of support from Canada's Prime Minister Justin Trudeau and a claim that no U.S. city can make: Come to Canada and "you stand to save up to USD $600 million per year because of our universal healthcare," he wrote.

Taking its extreme slogan of 'Live Free or Die' to heart, New Hampshire's proposal offered no incentives but simply highlighted the fact that the state has no use tax, sales tax, estate tax, internet access tax, capital gains tax, broad-based personal income tax and low business taxes.

"New Hampshire does not rely on complex and contingent special tax deals because New Hampshire never collects the tax in the first place. So, our government process does not pick winners and losers. Instead, every citizen and every business is a winner," the proposal stated.

The state estimated the benefits of its tax policy to Amazon at $600 million a year.

Amazon has been mum about the process it will undertake in reviewing the proposals, only that it will not announce a decision until next year. Stay tuned.

New High-Tech 'Sports Districts' Seen as Winning Strategy for Developers

OCTOBER 19, 2017

Live-action sports are finally coming to Las Vegas, which until recently was one of the largest major U.S. markets without a major-league sports franchise. Yesterday MGM Resorts International announced that it purchased the WNBA's San Antonio Stars and will move the team to Las Vegas, joining the Golden Knights NHL franchise, which makes its debut this season.

Also, retail developer Howard Hughes Corp. (NYSE: HHC) recently revealed plans to build a new 10,000-seat ballpark for the Las Vegas 51s, its Triple-A affiliate of the New York Mets, to be located in the company's massive master-planned community in Summerlin.

And that's not even counting the pending relocation to Las Vegas of the NFL's Oakland Raiders, slated to begin playing in a new 65,000-seat, $2 billion domed stadium in 2020 or 2021. Nevada transportation officials recently began planning about $900 million in infrastructure improvements near the 62-acre site along Russell Road. But that may be the tip of the iceberg compared with the total retail, dining, hotel and residential development planned around the new sports venues. Across the U.S., real estate companies ranging from large REITs and entertainment companies to private local and regional developers - often team owners themselves, such as Los Angeles Rams owner and developer Stan Kroenke, and Detroit Pistons owner and Quicken Loans founder Dan Gilbert - are driving construction or renovations of sports stadiums and arenas -- and the surrounding mixed-use entertainment districts that spring up around them.

Total spending on stadium construction reached a record high of $10 billion on a moving 12-month basis last June, according to a recent report by Wells Fargo Securities. And much of the financing for the development surge is coming from private sources rather than public funding used to finance projects in the past.

Teams Ramp Up Tech, Luxury Box Spending

Private financing has also provided teams with the opportunity to enhance the in-venue fan experience in an attempt to help combat sagging attendance by luring fans out of their living rooms and sports bars, including higher investments in technology and premium seating, Wells Fargo said.

The 2009 construction of the $1.3 billion AT&T stadium, home of the Dallas Cowboys, sparked a trend toward massive 360-degree HD video boards, 3D projection, retractable stadium roofs, age-check verification software for beer vendors, development of cell phone apps and free Wi-Fi for fans to check their fantasy league scores and post on social media.

Following suit, the San Francisco 49ers' new Levis Stadium, located in the Silicon Valley hub of Santa Clara, includes 70 miles of wiring throughout the stadium supporting 1,200 distributed antenna systems, bringing 40 times more Internet bandwidth to fans in their seats than any other stadium in the U.S.

In blue-collar Milwaukee, where teams have long played second-fiddle to their rivals in Chicago to the south along Lake Michigan, former Vornado Property Trust exec and part-owner of the Milwaukee Bucks NBA franchise Michael Fascitelli is building a $525 million arena that will include an entertainment block and beer garden. The Bucks are slated to begin playing in the venue next year.

"It's all about taking advantage of brand scarcity of the teams," Fascitelli said during a panel discussion at the recent DLA Piper Real Estate Summit in Chicago. "It's hard to know the value of a team, but with the brand, you can create a lot of development and value around it.

"There's a rush to build or renovate NBA areas all over the country to take advantage of technology and consumer demand," Fascitelli added, saying that Bucks ownership will spend $30 million on technology compared to the $1 million budgeted for the team's current arena.

"If kids go into the arena and lose their ability to text, they go into meltdown mode, like withdrawal from a drug," Fascitelli said.

"Whether it's a ballpark, pavilion, or another kind of sports use, it's all about destination and entertainment," added David R. Weinreb, CEO of Howard Hughes Corp. "It's about being social. At the core, that's why we dont believe retail is going away."

Stadium Benefits Ripple Outward

The convergence of technology and surrounding development proved a stunning success on the opening night of baseball season in Atlanta. Opening-night ticket sales, retail and concessions revenue at the $722 million SunTrust Park, the new home of the Atlanta Braves, was the largest in team history, according to executives for Braves team owner Liberty Media.

Liberty Media became interested four years ago in the stadium's impact beyond the turnstiles on surrounding commercial property, executives said.

"Weve seen numerous precedents for appreciation in land surrounding new ballparks and older sports venues as well, and we wanted to take part in that value creation," said Greg Maffei, Liberty president and CEO, citing LoDo around Coors Field in Denver; L.A. Live around the Staples Center, and Wrigleyville around Chicago, among others.

Liberty's own mixed-use development surrounding the ballpark, Battery Atlanta, is coming on line with major office tenant Comcast set to move in November and the Omni opening a hotel in the first quarter of 2018.

"The secret sauce of whats going on here is the synergy between The Battery and SunTrust Park, and its a model breaking phenomenon," said Liberty Chairman and CEO Terry McGuirk during a Braves investor meeting in August. "Everybody who comes through looks at it and wants to duplicate it, replicate it -- for any new project that is going on anywhere in sports, this is the model."

While construction of new stadiums has have long boosted the value of surrounding private property, "its usually owned by someone else," McGuirk said. "We said we're going to take a much more holistic approach and build this from the ground up," he added. The result has been a "raving success."

"Our fans come early, stay late and they are just eating it up," McGuirk said. "Battery is just overwhelmed almost every day that the team is in town. The first week [of the baseball season], all the retailers ran out of food or beer or clothes. They had no idea of the kind of uptake that was going to occur here."

Faster Growth of Amazon Fashion Could Rock Retail Real Estate

OCTOBER 12, 2017

By: Marl Heschmeyer

Impact Would Likely Fan Out to Mall REITs and CMBS

Lost in the coverage of Amazon's very public search for a second, multi-billion dollar national headquarters, was the barely-noticed lease the company signed in New York City last month. Yet that lease could signal billions of dollars in losses coming for retail commercial real estate across the country.

Amazon signed a 15-year office lease for 360,000 square feet at Brookfield Properties' recently-renovated 5 Manhattan West building. Amazon will take the entire sixth and seventh floors of the 2.15 million-square-foot tower as well as part of the eighth and 10th floors in a move that is expected to bring 2,000 jobs to the Penn Plaza / Garment District submarket of Manhattan.

Amazon Fashion has also previously invested $9 million in a 40,000-square-foot fashion photo studio in Brooklyn (pictured).

"We're excited to expand our presence in New York - we have always found great talent here," said Paul Kotas, Amazon's senior vice president of worldwide advertising.

Those jobs will be coming primarily in the Amazon Fashion and advertising divisions, and that signals the online retail behemoth is getting more serious about advancing its fashion and apparel sales. In the past year alone, it has introduced seven private apparel brands to its Prime members, including Goodthreads, Amazon Essentials, Paris Sunday, Mae, Ella Moon, Buttoned Down and Lark & Ro.

A hypothetical rapid rise in Amazon's U.S. apparel market share could have significant credit implications for existing retailers, REITs and CMBS transactions, according to Fitch Ratings in a 'shock scenario report' published last month.

Worst-Case Scenario

Sharp declines in retailer revenue and margins, along with accelerated store closings, would likely drive significant cash flow erosion and weaken credit profiles for apparel-focused retailers, mall REITs and retail-heavy CMBS deals in such a scenario.

This shock would likely fan out broadly across much of the retail real estate sector, with large credit profile effects on mall REITs and retail-heavy CMBS transactions. Large-scale store closures, going well beyond previously announced cuts, would likely follow, Fitch projected.

"REITs owning regional malls with high exposure to troubled anchor stores and a less diverse tenant base would face heavy cash flow pressure," Fitch analysts said. "We estimate that as many as 400 of approximately 1,200 U.S. malls could close or be repurposed as a result of retailer liquidations and square footage reductions."

In addition to weaker cash flow, many mall owners would face reduced access to capital due to negative lender and investor sentiment. Attempts to re-tenant or repurpose underperforming malls with high vacancy rates would likely take considerable time and capital. Efforts by REITs to reposition mall properties in this scenario would be difficult given constraints on capital spending and liquidity in a tight financing environment.

"Widespread defaults on loans backed by malls would have a significant impact on credit quality for Fitch-rated CMBS transactions," the rating agency said. "Given the accelerated timeframe of this retail shock scenario, special servicers would be forced to sell lower tier malls at significantly distressed values rather than undertaking normal stabilizing efforts."

The Fitch stress test does not explicitly factor in retailers' responses to a more challenging operating and financing environment. Many of these responses, including cost reduction initiatives, asset sales and secured debt issuance, could mitigate the impact of such a severe competitive shock, particularly for companies that have ample liquidity to respond to accelerated competitive threats.

And let's face it, fashion and apparel margins and sales are thin and thinning out, and could present a tough market for Amazon to break into. Competitive pressures on in-line apparel retailers have been building for at least a decade. Younger apparel consumers have demonstrated less interest in traditional department store fashion offerings, and shifted more toward 'fast fashion' and off-price retailers.

Retail real estate brokers operate in dual worlds when it comes to shopping. They are both consumers of merchandise online and brick and mortar sales people. As such, their take on Amazon is interesting.

Going into fashion is nothing new to Amazon, said Soozan Baxter, principal of Soozan Baxter Consulting, a New York-based, landlord-focused retail advisory firm. "They own Shopbop and Zappos. Shopbop is a phenomenal collection of contemporary brands with a loyal customer, while Zappos is a favorite for anyone who likes to buy shoes online."

However, shopping on Amazon is like being in an online market place without a point of view, she said. The chaotic experience doesn't resonate.

"If they can execute a bricks-and-mortar experience that is more like Shopbop and perhaps even use that name, they will be very successful," Baxter said. "If they execute more retail stores under the name Amazon, do customers get confused: is it the bookstore? Is it a Macy's? Is it an Intermix? Is it a car showroom? Is it a grocery store? The point of view gets confusing."

"The bottom line is that the margins in retail are challenging. As they want to delve further into bricks and mortar, can they create a different experience? Furthermore, Amazon has been richly rewarded by Wall Street without making a 'real profit.' As Amazon morphs into more of an omni-channel player, how will Wall Street respond to them?" Baxter asks.

"Apparel has always seemed to be an area of retail that requires a brick and mortar presence for the customer to see, touch and try on merchandise before a purchase, as on-line purchases of apparel have a much higher return rate compared to other products sold online," Polley said.

But the problem is not all Amazon.

"Despite Amazon's clear impact, I do believe some apparel retailers have lost touch with their customer base and their core mission to deliver what their customer wants to buy," he added.

Paul Schloss, an associate broker at NAI Horizon in Tucson, also says the onus is on traditional retailers.

September 21, 2017

The commercial real estate industry's chief lobbying group Tuesday urged lawmakers to take a measured approach in deciding on changes to how commercial property and other corporate assets are taxed, cautioning that the elimination of the deduction for interest on debt and reducing the tax rate for pass-through business income could cause severe damage to the U.S. economy.

While supporting a broad acceleration of economic growth through tax reform that would boost real estate construction and development and spur job creation, Congress "should be wary of changes that result in short-term, artificial stimulus and a burst of real estate investment that is ultimately unsustainable and counterproductive," Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer said in testimony before the Senate Finance Committee.

"Real estate investment should be demand-driven, not tax-driven," DeBoer said. "In short we should avoid policies that create a sugar high that is fleeting and potentially damaging to our future economic health."

Meanwhile, the Senate Finance Committee focused on business interest deductibility and other corporate tax issues in what could provide a clue to what measures will be included in a tax-reform outline that Republican tax writers plan to release next week.

DeBoer and others, including Troy Lewis, the immediate past chair of the tax executive committee of the American Institute of Certified Public Accountants, warned that scrapping the deduction would increase the cost of capital, disrupt credit markets, hurt small businesses that lack access to equities markets and discourage investment in commercial development and other business activities.

DeBoer noted that interest on the cost of borrowing is an ordinary and necessary business expense that has always been deductible. PLacing restrictions on capital markets would discourage business expansion, he asserted, and said the impact would fall disproportionately on developers and other entrepreneurs in small and medium-sized markets.

"As interest rates rise, the harm to the economy will grow," DeBoer said.

While shortening real estate depreciation from the current 30 years to 20 years would spur investment, DeBoer also warned that a proposal to allow full expensing of depreciation is "a risky and untested proposal."

Tax experts such as Scott Hodge, president the Washington, D.C.-based Tax Foundation; and Donald Marron of the Urban Institute and Urban-Brookings Tax Police Center, said reform of the corporate tax code, including cutting corporate tax rates from 35% to 20%, would provide a dramatic boost to the economy.

Marron cautioned, however, that adding to the federal deficit in order to cut corporate taxes would likely offset the economic benefits.

"Policymakers should be realistic about near-term growth from business tax reform," Marron said. "The growth effects of more and better investment accrue gradually. If reform is revenue-neutral, revenue raisers may temper future growth. If reform loses revenue, tax cuts mixed with reform, deficits may crowd out private investment."

September 20, 2017

Quicken Loans founder, Cleveland Cavaliers owner and real estate investor Dan Gilbert this week announced details of his plans for a quartet of projects in downtown Detroit aimed at rebuilding the CBD of the Midwest's second-largest city after Chicago.

Bedrock, one of the ventures under Gilbert's Rock Ventures LLC holding company, unveiled the $2.1 billion in projects that include redevelopment of the former J.L. Hudson's department store site; ground-up construction on a two-block area of Monroe Avenue east of Gilbert's downtown headquarters; renovation of the Book Tower and Book Building, and a nearly $100 million expansion of the One Campus Martius building, headquarters of Gilbert's Quicken Loans mortgage operation.

Gilbert, Detroit Mayor Mike Duggan and other elected officials and community members met at Book Tower to announce the proposals, which would be built over five years. The projects now go before the Detroit Brownfield Redevelopment Authority, the first step toward approval of new state financing under Michigan Thrive, or MIthrive, a revitalization program enacted into state law earlier this year.

"The economic impact this project will have on our city is larger than anything we've seen in generations," Duggan said. "Not only will it produce thousands of new jobs and opportunities for Detroiters, it will reshape the city's skyline and attract even more re-investment in Detroit."

The projects include the following:

* Hudson's Site, a $900 million, 1 million-square-foot redevelopment of the iconic department site slated to include the tallest tower in the city, restaurants, retail and office space;* Monroe Blocks, an $830 million development between the Greektown district and Campus Martius Park, which will include a 35-story, 814,000-square-foot office tower, 482 residential units, restaurants, shopping and three public plaza spaces;* Book Tower, a $313 million renovation of the Book properties that will be one of the most significant rehabilitation ever undertaken in the Motor City, along with 95 residential units, 180,000 square feet of retail and office space, and a hotel;* One Campus Martius, a $95 million expansion that will include 310,000 square feet of office space.

Gilbert is aiming high with the venture, even courting Amazon.com's planned 52,000-employee HQ2 headquarters project, with the billionaire describing Detroit as "a legit contender" for the 52,000-employee complex that in recent weeks has become America's most coveted economic development venture.

Bedrock intends to seek assistance through MIthrive, which uses local brownfield tax increment financing (TIF) for development opportunities across Michigan. The TIF allows projects to keep a portion of the state tax revenue they generate to help close the gap between high redevelopment costs and what market rents can support.

September 14, 2017

With relief efforts under way in areas ravaged by Hurricanes Harvey and Irma, analysts are now beginning to assess the broader questions of how the back-to-back natural disasters could potentially affect U.S. economic growth, the near term impact of the thousands of residents and tenants displaced by the storms, and how the threat of future storms may affect investor appetite for coastline property in areas with elevated exposure to destructive tropical cyclones.

The losses are expected to be staggering. The death toll for Hurricane Irma, which caused historic destruction across Florida, stood at 81 early Thursday, with nearly 7 million Florida residents without power, while the death toll for Harvey rose to over 40 people this week. If there's a silver lining for the Houston economy and CRE market, it's the unintended consequence that certain sectors of Houston's commercial real estate market may see upside as residents, relief and construction personnel, scramble for undamaged spaces to live and work.

About 38% of the Houston metro's gross leasable area is located in a flood plain, based on a CoStar analysis of NASA satellite images, FEMA flood plain maps, aerial images from CoStar's research airplane and information from individual property owners obtained by CoStar research and market analysts. All told, about 200 million square feet of properties were impacted by water as of Aug. 29, the first day of sun following the storm.

Meanwhile, Houston CRE professionals continue to work with relief and restoration personnel to pick up after the devastating storm that dumped 24 trillion gallons of water on the 700-square-mile Houston metro. There are early signs of the continuing resilience of Houston's commercial real estate market, hard hit for the last few years by the oil bust and exodus or consolidation of energy companies.

"I don't think people have a really good handle on how badly affected this city has been. It's an open wound here," Wyatt tells CoStar.

Despite the extent of the destruction, Wyatt said he has been amazed by the strength and resolve of the people of Houston.

"The teamwork is unbelievable. We had Lincoln Property engineers launching boats out of monster trucks, driving through the water pulling people out of flooded homes," Wyatt said.

Jim Black, SIOR, senior vice president with Houston-based Caldwell Companies, said the hit to overall productivity will be one of the biggest impacts in Houston.

“Those people who have been displaced were also Houston’s workers. Our company divided into teams and every seventh day, they’re going out and doing cleanup and other volunteer work,” Black said. “There’s a disruption in this city and there will be for quite some time. I don’t know of any business or person who work for a company that doesn’t have some impact."

As for the short-term real estate impact, construction is going to be a booming market in the wake of Harvey for both residents and businesses, and office tenants will likely seek to take space in undamaged buildings.

"Between government regulations and shortages of labor and materials, we’re likely to see construction costs escalate substantially across all sectors, both residential and commercial," Black said. "In Houston we may get a double whammy, with some the same materials and labor being needed in Florida. Costs are going to go up."

Wyatt said among CRE professionals and other companies, "it's largely back to business here."

"We've talked to many tenants who were looking for plug-and-play space. Most of them decided that rather than move for 60 or 90 days to get their building dried out and back online, they’ll find alternative ways to office, probably in some cases out of their homes."

Irma Damage Extensive but Less Than First Feared

Although Irma’s storm surge proved incredibly destructive across much of Florida, it could have been much worse if initial projections on the storm's path had held, Moody's Analytics reported.

Jacksonville, FL, and Charleston, SC, were not in the hurricane’s direct path, however, both were caught in Irma’s storm surge, resulting in higher-than-expected property damage there, according to Moody's. However, overall the level of damage on CRE property wrought by Irma is significantly milder than it was in Houston and southeast Texas, Moody Chief Economist Mark Zandi said.

"While smaller restaurants and shops suffered severe damage in areas like Key West, their price tag is relatively modest compared with CRE holdings elsewhere in Florida," Zandi said. "The industrial and office markets emerged largely unscathed, and damage to the large Miami multifamily market was minimal."

Meanwhile, analysts are in the process of evaluating how CRE investors may react to the turmoil in Texas and Florida markets. A preliminary estimate by Moody's projects the economic cost of Hurricane Irma to be between $64 billion and $92 billion. Combined with the $108 billion in estimated damages from Harvey, the $150 billion to $200 billion economic hit from the two storms could eclipse Katrina, the costliest natural disaster in U.S. history to date with $160 billion in damages.

Economists from Goldman Sachs, Moody's and other firms cut their estimates for third-quarter GDP growth by up to 0.8% as a result of Harvey and Irma.

"A temporary slowdown in areas severely impacted by Hurricanes Harvey and Irma, geopolitical tensions abroad and any minor correction in the financial markets could temporarily knock the economy slightly off course in coming months," noted Lawrence Yun, chief economist with the National Association of Realtors.

While past natural disasters have tended to produce a short-term bump in capitalization rates, they reverted to the norm over the longer term, suggesting that CRE investors tend to play down national disasters in making investment decisions, said Suzanne Mulvee, CoStar director of U.S. retail research, who along with managing consultant Paul Leonard delivered a recent report on Harvey's impact on commercial property markets.

However, Mulvee added, the impact from the consecutive storms could change things.

"Two storms back to back with potentially record-setting damages could change investor appetites for districts within these markets, depending on their location with a flood plain," said Mulvee. "We're reserving analysis until we know more about the Irma impact."

According to CoStar estimates, about 610 million square feet of commercial property valued about $75 billion in value is within the observed Houston flood plain and water inundation areas. Retail property makes up the largest amount by value at more than $26 billion, followed by multifamily at nearly $18.5 billion.

The high percentage of Houston CRE properties located within the flood plains will create a dynamic investment climate as investors determine whether to remediate or sell properties, providing some unique value-add opportunities for buyers, Marcus & Millichap said in a special report on the hurricane. Long term, Houston’s economic growth and strong demographics bode well for investors, M&M said.

CoStar Research aerial footage of same site on Sept. 8 after flooding from Harvey.

Nearly all of the Houston metro's office buildings escaped the worst flooding, with fewer than 40 office buildings totaling 9 million square feet of the market's 1,200-building, 214 million square feet of inventory sustaining some level of damage, mostly to lobbies and parking garages, according to a report by CBRE. Most of the damaged office buildings are in four areas to the west and northwest of the CBD, including West Houston, Allen Parkway, West Loop/Galleria and FM 1960/Highway 249. The submarkets comprise about 35% of the Houston's total office stock, with an occupancy rate of 84% occupied at the end of the second quarter.

Displaced tenants are already actively searching for turn-key temporary space, with many expected to return to their original locations as soon as next month. With more than 11 million square feet of available sublease space in Houston at midyear, displaced tenants will have plenty of options to sign very short-term leases while their buildings are repaired or they seek more permanent quarters elsewhere, resulting in a decline in sublease availability in the third quarter, CBRE said.

"The flooded buildings aren't going away, but you're going to have tenants that are a lot more aware of flood issues and will not be going back to buildings built on or near the bayous that flooded, or had major access issues," Wyatt said. "They may go back to fulfil their lease, but eventually they're going to move to a building that's immune from flooding."

Houston Industrial, Retail Requirements Expected to Rise

Relatively few buildings in Houston's largest industrial hub, Inner Northwest and North/Northeast, sustained major damage. Most of the damaged properties were older warehouse stock near the bayous. At the same time, construction materials companies are negotiating for warehouse to supply the rebuilding effort that is expected to exceed $100 billion over the next year.

CBRE forecasts a spike in requirements by suppliers, charities and consumer goods distributors for nearly all sizes of industrial properties as a result of the massive reconstruction effort, which includes an estimated 100,000 damaged and destroyed homes.

Hurricane damage to retail properties was limited mainly to neighborhood and strip centers in the hardest hit areas. In fact, the main barrier to Houston’s higher-quality retail market is limited availability. The Class A retail occupancy rate was a record 97% in the second quarter, and displaced store tenants are having a tough time sourcing temporary space.

Multifamily Bears Brunt of Storm Damage

By far the majority of the flood damage was sustained by single-family homes in suburbs to the northeast, west and southwest of downtown Houston. However, an estimated 105,000 apartments were damaged, as many as one out of every six multifamily units, according to figures supplied by the Houston Apartment Association.A few submarkets sustained damage to much as 30% of stock, generating immediate demand for rentals.

The storm hit some submarkets harder than others. Overall, the amount of potentially damaged space in the CBD district is less than 1% of total inventory. The Galleria, Westchase Plaza and Greenbay markets suffered little if any significant damage.

However, properties within a quarter mile of the 100-year or 500-year flood plain, particularly the Buffalo and Brays bayous and the Barker and Addick’s reservoirs, including many buildings in the Energy Corridor/Katy Freeway West district, the metro's second-largest submarket with 20 million square feet, were heavily impacted.

Flooding was contained largely to properties within a quarter mile of a 100-year or 500-year flood plain, particularly Buffalo and Brays bayous. The Barker and Addick’s reservoirs are located in the heart of where submarkets in the southwest part of the metro like Sugarland and Southwest Beltway were severely impacted.

Apartment units for rent in properties unscathed by flooding in west, northwest and northeast Houston will see sharp occupancy increases by the end of this month, CBRE said. Concessions and move-in specials common in the apartment market since 2016 are expected to evaporate faster than the flood waters.

Hotels throughout the metros should see a rise in occupancy, from displaced residents as well as relief agencies and reconstruction personnel. FEMA is already housing 53,000 people in government-funded hotel rooms.

Relatively few of Houston’s 868 hotels suffered damage. Based on data from four previous disasters, including Hurricanes Katrina, Ike and Andrew and Superstorm Sandy, hotel demand rose by 10% to 40% in the surrounding markets in the month after each event, according to CBRE.

Growth rates by market will vary, with Texas cities such as Austin, San Antonio and Dallas-Ft. Worth possibly seeing heightened demand meetings and conventions originally booked for Houston are relocated. Based on history, hotels in the five major Texas markets could generate an additional 3.4 million room nights of demand and roughly $430 million in additional revenue.

Hotel projects under construction or in the pipeline could feel the pinch of the tight market for labor and materials. Houston had more than 5,000 rooms under construction prior to the storm, and many of the projects are expected to be delayed.

Amazon Outgrows Seattle: Opens Search for Second HQ City in North America

September 7, 2017

Amazon today is posting another unique offering you can bid for online: a new headquarters site in North America.

The company is seeking sites in major North American cities for a "full equal" to its Seattle headquarters, dubbed Amazon HQ2. The online retailer expects to invest over $5 billion to build and operate its new co-headquarters, which it said could include as many as 50,000 high-paying jobs.

In addition, Amazon HQ2 is expected to create tens of thousands of additional jobs and tens of billions of dollars in additional investment in the surrounding community.

Amazon estimates its investments in Seattle from 2010 through 2016 resulted in an additional $38 billion to the city’s economy, providing data that showed every dollar invested by Amazon in Seattle has generated an additional 1.4 dollars for the city’s economy overall.

Real estate owners and state and local government leaders interested in learning more about how they can bring Amazon to their community can visit AmazonHQ2.

“Amazon HQ2 will bring billions of dollars in up-front and ongoing investments, and tens of thousands of high-paying jobs," said Jeff Bezos, Amazon founder and CEO, in announcing the new headquarters search. "We’re excited to find a second home.”

Amazon listed the following criteria for choosing the location for HQ2:

Metropolitan areas with more than 1 million people;

A stable and business-friendly environment;

Urban or suburban locations with the potential to attract and retain strong technical talent; and

Communities that think big and creatively when considering locations and real estate options.

Amazon said the new location could be, but does not have to be, an urban or downtown campus with a similar layout to Amazon’s Seattle campus and a fully entitled, development-prepped site.

"We want to encourage states and communities to think creatively for viable real estate options, while not negatively affecting our preferred timeline," the company said in its announcement.

Amazon expects to hire new teams and executives in HQ2, and said it plans to allow existing senior leaders across the company to decide whether to locate their teams in HQ1, HQ2 or both. The company expects that employees who are currently working in the Seattle HQ can choose to continue working there, or they could have an opportunity to move to HQ2.

Growing Exponentially

Amazon has been experiencing exponential growth and announced earlier this year hiring projections of adding more than 100,000 new, full-time jobs through next June. And, it has been expanding in markets across the country. The following is a list of major expansions undertaken just this year.

Amazon Expansion Move - Date

Opens search for Amazon HQ2 - A second headquarter city in North America -- September-2017

More Than One-Quarter of Houston's Commercial Real Estate May Have Suffered Flood Damage

August 31, 2017

By Randyl Drummer

As Recovery Phase Begins, Economists, Property Owners Take Stock of Catastrophic Flood Damage, May Be Weeks Before Full Extent of Impact Can be Determined

An initial assessment of the potential impact of the epic storm on the Houston commercial real estate market by CoStar Group reveals that 27% of the market's gross leasable area, representing $55 billion in property value, is located in flood zones and may have potentially suffered damage.

$16 billion of the $55 billion in property at risk is comprised of apartment buildings within the 100-year flood zone.

As the flood waters finally begin to recede in Texas and Louisiana, officials caution the storm waters continue to pose threats to life and property. However, the region is shifting into recovery mode and beginning to take a full measure of the unprecedented destruction brought by Hurricane Harvey.

A CoStar Group, Inc. assessment of the potential impact of the epic storm on the Houston commercial real estate market reveals that 27% of the market's gross leasable area, representing approximately $55 billion in property value, was likely affected by flooding.

Included in the estimated is 175 million square feet of commercial space located within the Houston metro's 100-year flood zone that appears to have been inundated by the epic floodwaters, including some 72,000 apartment units and 20 million square feet of office space. Another 225 million square feet sits in the wider 500-year floodplain and also appears to have been affected by flooding.

Harvey, which first made landfall at Rockport, TX, as a Category 4 hurricane early Aug. 26 and then stalled over the Texas coast, broke all records to become the wettest tropical cyclone in the contiguous United States, and the strongest in terms of wind speed to hit the country since Hurricane Charley in 2004. Weather experts have estimated that through Wednesday, the storms had dumped an estimated 20 to 25 trillion gallons of water on Texas and Louisiana.

"Unfortunately, the number of displaced residents could be far larger than current media reports indicate," CoStar Group founder and CEO Andrew Florance said. "Our property-by-property review of the assets in the flood plain reveals an outsized share consists of low- to moderate-income households, including those in southwest Houston, where the bayous overflowed."

Editor's note: Click here to view CoStar's microsite on Harvey's impact on Houston commercial property, including a map, charts and a list of potentially affected properties.

Greater Houston ranks as the sixth-largest U.S. metro area in the U.S. by total CRE space at 1.6 billion square feet. A total of 12,000 properties with 400 million square feet of space are within the Federal Emergency Management Administration (FEMA) designated 500-year flood plain zone. Only 9 million square feet of that space, including 4,000 apartments, is located within a designated floodway.

According to CoStar data, $16 billion of the $55 billion in property at risk is comprised of apartment buildings within the 100-year flood zone. The key question for all CRE owners, investors, tenants and analysts is now how much of that property has or will sustain damage due to water incursion.

CoStar is planning to conduct an air survey to more fully assess the damage as soon as it is authorized to do so.

The densely populated Southwest Houston submarket, home to more than 66,000 apartment units, is likely to be the district most affected by flooding. Nearly 30% of the submarket's apartment units are estimated to be impacted, with the Braeburn, Greater Fondren and Sharpstown neighborhoods having the largest number of units within the 100-year flood zone.

Each of those neighborhoods borders Brays Bayou, one of the river ways that snakes through southwest Houston and has overflowed because of the historic torrential rains.

An additional 5 million square feet of space is under construction within the floodplain, including 3,144 apartment units, representing about one-fifth of the 25 million square feet of CRE under construction in Houston, including more than 12,000 apartment units.

The Greenspoint district, which has had elevated vacancies following the departure of ExxonMobil in late 2015, is the metro's most impacted office submarket, with some 3.5 million square feet falling within the 100-year floodplain.

Few Definitive Damage Reports Yet Available

Many CRE owners and managers had not yet been able to access their properties as of mid-week, let alone make a comprehensive estimate of losses from Harvey, which has dumped almost 52 inches of rain in parts of southeastern Texas. At least 37 deaths had been reported as of early Thursday.

Pure Multi-Family REIT LP, a Vancouver-based multifamily REIT, reported that its 216-unit Boulevard at Deer Park property in the suburb of Deer Park southeast of Houston was placed under an evacuation order due to flooding in the immediate area. The company did not immediately have an assessment of potential damages.

The company's second Houston property, the 352-unit Broadstone Walker Commons in League City south of Houston, Texas, was not materially affected by the storm, though they will continue to monitor the property. 10 properties in Dallas Fort Worth, four properties in San Antonio, and one property in Austin

Pure Multi-Family REIT, which owns 10 properties in Dallas/Fort Worth, four properties in San Antonio, and one property in Austin, said it will make thorough inspections in coming days and weeks to assess the extent of any damage.

"We anticipate that it may take weeks to adequately assess the damage, if any, at our two properties in the Houston area," said Pure Multi-Family CEO Steve Evans. "As a normal course of business, Pure Multi-Family has insurance policies in effect at all of our apartment properties."

"It is going to take some time for the extent of the damage in the greater Houston area to be fully understood," Evans said.

A number of REITs and other CRE owners issued statements providing update on their Houston-area properties and efforts to help staff and tenants, with companies reporting they have adequate property and casualty insurance coverage in place, and that wind and rain was hindering damage assessments, including single-family home rental firm American Homes 4 Rent, which owns about 3,200 rental houses in the Houston market area.

"Our assessment will be ongoing for several days," said American Homes 4 Rent CEO David Singelyn.

Oil, Gas Line Damages to Drive up Gas Prices

Walter Kemmsies, a managing director, economist and chief strategist for JLL’s U.S. Ports, Airports and Global Infrastructure Group, tells CoStar that direct and indirect damage from the catastrophe, while not yet known, will certainly have an impact that ripples across the country.

Damage to oil and gas pipelines will cause supply problems that will result in increased fuel prices across the U.S., a process that has already started. With more than a dozen refineries closed due to flooding, the national average hit $2.43 per gallon as of mid-afternoon Wednesday, up 7 cents from a week ago, according to consumer information site GasBuddy.com.

From the perspective of impact to U.S. seaports, Harvey is comparable in magnitude and impact to hurricanes Katrina and Sandy, while farmers will need to assess agricultural damage to crops that were going into the late-summer harvesting season.

JLL Managing Director Walter Kemmsies said seaports such as Port Houston could feel the sting of Hurricane Harvey economic impacts.

"All of this happening before the cresting of the flood waters," Kemmsies said. "And that water still has to drain (before the extent of the problems is known). We’re all just biting our nails."

As a result of the Panama Canal expansion and increased downstream demand in recent years, port volumes and industrial real estate demand are higher than ever in Gulf Coast ports, Kemmsies noted. At Port Houston, for example, 20-foot equivalent unit (TEU) volumes increased from 4.6% to 5.2% of total U.S. TEU volumes from 2010 to 2017, he said.

Under contingency plans that go into effect at the first warning of a hurricane, cargo slated for export would have been rerouted to other upland ports, and Port Houston could see reduced shipping volumes because Hurricane Harvey will likely disrupt railroad connections as far as a couple of hundred miles away, Kemmsies added.

Chinese Govt. Moves to Stem Flow of Funds to Overseas CRE Investments

August 24, 2017

By Mark Heschmeyer

Any Curtailment of Investment Flow Could Impact Deal Pricing for Major Assets in Largest Gateway Markets, Although Analysts See Plenty of Other Investors Available to Fill Any Gap

The U.S. commercial real estate market could soon find out what happens when the government of the world’s largest country tightens the spigot on overseas investments from its citizens. Last week, the State Council of the People's Republic of China officially announced measures to curb outbound investment - a move Chinese officials had been hinting at all year.

Announcing the new measures were intended to promote the "healthy growth of overseas investment and prevent risks," the new directives from China’s State Council cover all overseas investments in companies, projects and properties.

Prominently listed on the restricted list of the new investment guidelines are real estate, hotels, casinos, entertainment, sport clubs, outdated industries and projects in countries with no diplomatic relations with China, as well as "chaotic regions" and nations that should be limited by bilateral and multilateral treaties concluded by China.

In addition, China said it would direct overseas investment to support the framework of its 2013 “Belt and Road Initiative.” More specifically, China said it would encourage domestic investors to put their money into eligible projects in Southeast Asia, Pakistan and Central Asia, and beyond to the Middle East, Europe and Africa. The State Council said it would encourage companies to invest up to $1 trillion in that initiative, with the goal of strengthening China's trade links in those regions, which has surged this year.

Mergers and acquisitions by Chinese companies in countries that are part of the 68 countries officially linked to the Belt and Road Initiative totaled $33 billion year to date, surpassing the $31 billion tally for all of 2016, according to Thomson Reuters data.

At the same time, Chinese investment in the U.S. has plunged by 50% in the first half of 2017, according the American Enterprise Institute and The Heritage Foundation’s China Global Investment Tracker. However, despite the huge drop, the amount of Chinese money flowing to the U.S is still likely to be the second-highest for Chinese investment in the U.S. on record, including mergers and acquisitions the two groups reported.

Chinese investors have accounted for $160 billion of investments into the U.S. between January 2005 and June 2017, according to the Tracker.

U.S. real estate, which is now on the outs as an investment target with China’s government, has played a huge role in the sale and financing of major CRE projects and portfolios. Year to date, Chinese investors have accounted for $4.14 billion of deals over $100 million compared to $3.5 billion for the same period last year, according to an analysis of commercial property sales in CoStar COMPs data.

What Do New Curbs Mean for U.S. CRE?

There's no question that further clampdown on one of the largest buyers of U.S. investment property will have broad impact across the institutional investment spectrum. However, analysts believe there are more than enough other investors out there to counter any decreased investment from China.

Chinese investors have accounted for only about 5% of all CRE transactions of $100 million or more since the start of 2016, according to CoStar. The other 95% share of those buyers have accounted for $285 billion of property sales over $100 million since the start of 2016. So there is still an abundant supply of capital, both foreign and domestic flowing to U.S. CRE.

In fact, China was only the third biggest source of cross-border capital into real estate in the first half of the year, behind Germany and the United Kingdom, according to JLL data.

However, experts expect Chinese investors will continue to play a significant role in U.S. real estate. Dr. Henry Chin, head of research, Asia Pacific in China for CBRE, said “while property’s inclusion on the list of restricted sectors mean any proposed overseas acquisitions by Chinese companies will be subject to additional layers of scrutiny, the impact will be far more nuanced.”

According to Dr. Chin, the new rules could only change how Chinese investors deploy their money. Other options include using offshore financial institutions to engage in property acquisitions, or use Hong Kong- or Singapore-based entities to purchase assets.

“Outbound investment will continue but the pace of capital deployment is likely to slow as investors adjust to the new rules and fine tune their investment strategies,” added Chin.

Pullback Could Affect Prices for Top Properties

One area that could see an impact is pricing for the top assets in core U.S. markets. Chinese investors have been willing to pay top dollar -- and that top bid could be going away. But, also in this case, some analysts say that may not be a bad thing either.

“The Chinese have stepped on some of the crazier things that happened in the market,” according to Barry Sternlicht - chairman and CEO Starwood Property Trust, who addressed the topic of the overall CRE market in his earnings conference call earlier this month. “If there are six bids at $1 billion and one guy is at $1.5 billion, I would ask you to tell me where the [loan to value] is?"

Sternlicht’s implication that the other six bidders are better indication of where the market top stands based on returns reflects the fact that Chinese investors, along with other foreign investors, have shown a greater willingness to invest in real estate as basically bond equivalent credit yields.

"They are not really real estate players,” Sternlicht said. “They are just buying the yield.”

Richard Hill and James Egan, REIT analysts at Morgan Stanley Research, said the investment restrictions on Chinese buyers could have the biggest impact on office and hotel properties located in gateway cities, particularly Manhattan. Real estate transaction volumes are likely to come under pressure in affected markets, creating headwinds for prices over the medium term.

“Over the medium term, it's another headwind to CRE prices and reinforces our cautious view on office REITs exposed to [New York City],” the Morgan Stanley analysts said. “With regard to the U.S. residential real estate, Chinese buyers represent the largest share of foreign investment, but only 0.7% of all sales over the past year and therefore we expect minimal impact to both prices and volumes.”

Midyear Multifamily Update: Too Much Apartment Construction, or Not Enough?

August 10, 2017

By Randyl Drummer

Even as Single-Family Homebuilding Finally Ramps Up and Cranes Continue to Pop Up for Downtown Apt Projects, US Housing Supply Remains Well Below Longterm Averages

Current supply and demand trends in the U.S. multifamily and single-family markets are sending some confounding signals to investors.

On the one hand, U.S. apartment construction has reached a post-recession peak, driven by demand for high-end luxury properties in the largest CBDs. On the other hand, both multifamily and single-family housing stock remain well below long-term averages that are not nearly enough to house the millions of millennials now entering their 30s and starting families -- not to mention the empty nest baby boomers who are increasingly opting for smaller, more conveniently located quarters in downtown apartment rentals.

The first phase of RXR Realty's Atlantic Station, a 325-unit high-rise apartment with dozens of affordable housing units, rises at Atlantic Street and Tresser Blvd. in Stamford, CT

With new apartment towers being built across almost every large American CBD, it's easy to forget that nationally multifamily construction inventory remains at roughly half the levels of the 1970s and 1980s.

"There is a lot of building going on, and while no one is saying that we need another luxury apartment building in many of America’s cities, we desperately need more housing," according to Mark Hickey, real estate consultant for CoStar Portfolio Strategy.

Multifamily construction has been increasing steadily since 2011 and construction levels are now at a rate not seen in 30 years. Yet, due the dramatic decline in single-family construction since the sub-prime mortgage collapse and recession of 2007, new households are forming at greater levels than U.S. housing can support, resulting in a strong supply and demand imbalance.

Home ownership rates are finally increasing again and single-family construction is slowly getting back on track, helping to let some of the steam out of apartment demand. That said, renters continue to lease apartments at a strong clip.

After several rocky quarters for apartment net absorption amid rapidly rising rental rates in many markets, renters filled a net 73,000 units in the U.S. during the second quarter -- the strongest quarterly total since 2014 and near an all-time peak -- as the national apartment vacancy rate again fell below 6% to 5.9%, according to CoStar data.

"The downtown cranes may give the appearance of a housing supply glut, but in fact, U.S. household formation has outpaced construction by more than 3 million housing units," said John Affleck, CoStar director of analytics, during the company's recent Midyear 2017 Multifamily Review and Forecast.

While CoStar is forecasting more temperate levels of rent growth compared with the torrid pace seen during the 2014 to 2016 period, annual rent growth for apartments in 2017 is still expected to exceed last year.

Latest 'Renters By Choice': Baby Boomers

While homeownership remains the largest risk for the multifamily sector, and is particularly pronounced among affluent renters who have the means to choose between renting or buying a home, increasingly it's downsizing baby boomers, not millennials, who are now driving apartment demand growth that sparked the current development wave a few years ago.

"It turns out that the older baby boomers are emerging as the real 'renters by choice,' " Affleck said."We've reached a point in the cycle where the rental rolls have added more 55-64 year olds than age 25 and up."

"We are being inundated by questions from investors on seniors housing opportunities, which will receive an increasing amount of attention going forward," Cohen said.

Almost out of necessity as home prices rise, publicly traded and private homebuilders that have based growth and profit projections for the move-up market may finally begin to shift their focus to entry-level housing targeting growing millennial families, Cohen added.

"The demographics suggest that homebuilders will catch on to the fact that the millennial generation, which now averages 26 years old, will produce several million millennial births and will need larger rental dwellings, or be looking for homes," Cohen added.

"Homeownership remains the goal of most American households and many more households would purchase home if they were more affordable and available," Affleck added.

The multifamily sector would also stand to benefit from building more affordable apartments as developers have for the most part continued to build expensive luxury buildings in core urban areas.

The expected new supply will continue to weigh heaviest on Class A apartment sector, which is expected to see peak levels of supply for the next two years. However, construction starts have started to slow as labor and equipment shortages push back some projects from their original timelines. Lenders have also pulled back in financing apartment construction in recent quarters, which could further put a brake on new construction.

August 9, 2017

Ground Up Development at 3rd & Lenora to House First West Coast Iteration of WeLive Communities

WeWork has confirmed it will bring its innovative, community-based apartment living product, WeLive, to Martin Selig Real Estate's proposed 38-story 3rd & Lenora apartment building slated to break ground this year at 2031 3rd Ave. in downtown Seattle.

The firms are collaborating on a ground-up mixed-use development in the Belltown neighborhood with architect Perkins+Will, Inc. When completed in spring 2020, the tower will house WeWork shared office spaces and WeLive rental units spanning 36 floors, as well as an array of common areas and retail spaces.

"We are excited for this opportunity to bring WeLive to Seattle. Together, WeWork and the Selig team are creating a building that will provide Seattleites with a place to live, work and play, and create opportunities for both the We community and the Seattle community to come together and connect," said James Woods, head of WeLive. "From our member-favorite chef's kitchens and inventive outdoor spaces to holistic wellness offerings and more, WeLive’s community-based apartment living is hassle-free and amenity-full, allowing our members to focus on their passions and live more fulfilling lives."

WeWork has more than 130,000 members across 163 locations around the world utilizing both physical and virtual workspaces. Founded by Adam Neumann and Miguel McKelvey in New York City in 2010, WeWork first entered the Seattle market in 2014 and quickly expanded to 2,500 members across four area locations including WeWork Lincoln Square, which opened in Bellevue in April 2017.

WeLive currently serves members across 400 apartment units at its first two locations, WeLive Wall Street in New York City and WeLive Crystal City in Virginia, both of which opened in the second quarter of 2016 and offer apartments ranging from studios to four-bedrooms, each delivered fully-furnished with everything a member needs to move right in -- from kitchen supplies and bed linens to HDTVs and high-speed internet. WeLive tenants, ranging from young people moving to a new city to families wanting to cut down on commute times and active retirees, enjoy shared spaces including movie rooms, lounge areas, workout studios, chef’s kitchens, and event offerings to encourage members to connect.

While pricing isn't available for the Seattle property, tenants in New York can rent apartment spaces for a day, a week or a year, with monthly rents starting at $1,900 per person or $3,050 for a private studio, while in DC a four-bedroom unit starts at $1,200 per person with private studios in the $1,600 range.

"Just steps from Pike Place Market and Seattle’s retail core, this one-of-a-kind project that brings shared workspace and community-based living into a single project is perfectly situated to serve Seattle’s growing innovative community," said Jordan Selig, managing director of Martin Selig Real Estate (MSRE), a family-run, privately-held real estate development and management company founded by Martin Selig in 1956. MSRE's pipeline currently includes six ground-up development projects, all located in Seattle, adding to its current portfolio of roughly 5 million square feet with a focus on multi-tenant office space.

July 27, 2017

By Mark Heschmeyer

Amazon and Consumer Brands Launch Major Incursions into the Grocery Business

Grocery stores, once considered more immune to risks from online competition compared with its clothing and department store counterparts, may not be as resilient as many have long thought -- and still think. After Amazon (Nasdaq: AMZN) dropped the bombshell news that it plans to buy Whole Foods Market Inc. (Nasdaq:WFM) for $13.2 billion, some investors and analysts are reassessing the prospect for e-commerce to make more rapid incursions into the food retail business.

"Once Amazon/Whole Foods’ full frontal assault on this space begins, I have no doubt that there will be at least a few grocery banners that go away,” Garrick Brown, who manages Cushman & Wakefield’s retail research, commented.

Other skirmishes between grocers and online retailers have been growing for the past couple of years and are also now intensifying. National name-brand food product makers are redirecting millions of dollars into e-commerce efforts to boost sales directly to consumers.

This month, Campbell Soup Co. (NYSE: CPB) announced plans to accelerate the company’s digital and e-commerce capabilities by forming an e-commerce unit in North America and setting a goal of generating $300 million per year in e-commerce sales over the next five years.

“E-Commerce is a significant growth opportunity for Campbell, and it represents the future of food commerce,” said Mark Alexander, president - Americas Simple Meals and Beverages, for Campbell Soup. “Only those who get there in a fast and smart way will win, and Campbell intends to do just that. We have an accelerated strategy to invest and grow in this space.”

The move is also seen as a response to slumping organic sales in the U.S. Campbell’s sales, which decreased 1% over the last nine months, driven by a 1% decline in organic sales, reflecting higher promotional spending and lower volume. In its Americas Simple Meals and Beverages division, the most recent sales numbers were down 2%.

In fact, equal weighted comparable grocery store sales growth within the industry is decreasing across the industry. Year-over year grocery sales were increasing a little more than 4% annually three years ago; that flattened to about 0.3% in fiscal year 2016, according to analysis by CoStar Portfolio Strategy. It is worth noting that some grocery heavyweights, including SuperValu Inc. (NYSE:SVU) and Whole Foods, recently posted negative same store sales growth.

Campbell’s goal to reach $300 million in e-commerce sales would represent 3.6% of the brand’s annual sales - a low penetration compared to a recent report from a Food Marketing Institute/Nielsen Holdings report. That study projects that online grocery spending could grow during the 2016-2025 forecast period from 4.3% of the total U.S. food and beverage sales to as much as a 20% share, or reaching more than $100 billion, based on the most upbeat scenario. Last year, online grocery sales were about $20.5 billion.

While such sales projections for e-commerce are modest compared with the overall store-based sales, any further reductions in store-based sales is seen as having a magnified impact on grocery profit margins, which are already razor thin - one to two cents per dollar according cuts to industry estimates. Food wholesalers, on the other hand, post margins closer to 13 cents on the dollar, according to these same industry estimates.

E-Commerce Impact Varies by Goods, Location

Julie Calcao, a senior credit analyst in Boulder, CO

For the past several years, grocers have taken comfort in thinking their business model was largely insulated from the impact of e-commerce. Julie Calcao, a senior credit analyst at a bank in Boulder, CO, is a good example of why it has taken longer for e-commerce to make its mark on the grocery business.

“I am a big online shopper when it comes to non-perishable goods,” Calcao said. “However, I like to pick my produce and meat as I am very picky. So, since I can’t buy all of my groceries online as I want to pick my own, I will continue to drive to the store.”

However, U.S. grocery shoppers are warming to online retail as 28% now prefer to purchase groceries online regularly, as reported in Acosta’s latest Hot Topic Report, Bricks & Clicks survey.

Colin Stewart, senior vice president at Acosta

“Amazon’s acquisition of Whole Foods is the perfect example of how the CPG [consumer packaged goods] landscape is changing and how technology and online retail have created a shift in the way people shop for groceries,” said Colin Stewart, senior vice president at Acosta, a full-service sales and marketing agency.

However, the Acosta report found the impact from online grocery shopping differs depending on where in the country shoppers live and their age.

E-commerce grocery shoppers are multi-faceted, though unsurprisingly, they skew toward Millennial age groups and people living in densely populated urban areas: 23% of older Millennials (ages 30-34), and 14% of younger GenXers (ages 35-39) are considered frequent CPG e-commerce shoppers, meaning they purchase groceries online an average of 50% or more of the time.

“Last year, over 52% of all online grocery sales in the United States came from just eight states. More specifically, they came from dense urban markets within those states; New York City, San Francisco, Chicago, Philadelphia, Miami,” said Ben Conwell, senior managing director and practice leader for Cushman & Wakefield’s e-commerce and electronic fulfillment specialty practice group. “We have still yet to see any large scale successes in the e-grocery space when it comes to sprawl markets or more sparsely populated areas.”

And, like the shopping patterns of Calcao, online sales have grown - specifically in dry-goods categories, nonfoods and health and beauty care - but brick-and-mortar retail continues to be preferred when grocery shoppers want to personally select their fresh meats, fruit, vegetable, cheeses and other chilled categories.

“Whether a shopper is clicking online for groceries or browsing the supermarket aisles, it’s important for brands and retailers to recognize the value and unique benefits offered by both purchase pathways,” Acosta’s Stewart continued. “E-commerce does not mean the end of brick-and-mortar stores, but it provides new and different growth opportunities for retailers, which requires them to form a new strategy tailored to how grocery shoppers prefer to buy their foods.”

Not Just Online, Grocery Stores Facing More Competition from Each Other

While Amazon's entry into the grocery business holds the prospect of new competition from a free-spending goliath bent on blending e-commerce with a physical store network, more competition is also coming from a broad range of other grocery companies that have committed to significant store expansions.

The trends are putting pressure on traditional grocers, especially the nation’s two largest -- Kroger and Albertsons Cos. -- to make some sort of strategic moves.

Kroger’s clout includes $115 billion in grocery sales per year in 4,000 properties.

Rodney McMullen, Kroger chairman, told analysts last month that it is taking a more hawkish look at cost cutting -- one that will “de-emphasize” new store growth in favor of infrastructure and digital spending.

The goal, McMullen said, is to connect with the customer directly in anyway the customer wants to -- whether it be in-store shopping, grocery pick-up or delivery. McMullen said Kroger already has enough scale to compete in this environment against the likes of Wal-Mart Stores Inc. (NYSE:WMT) and Amazon. Kroger racks up about $115 billion in grocery sales per year and owns or leases about 4,000 properties.

Albertsons growth plans includes more like its 2015 acquisition of Safeway.

The next largest traditional grocery store chain, privately held Albertsons Cos., has spent the year building a digital marketing and e-commerce department under Narayan Iyengar, a former e-commerce executive with the Walt Disney Co. In his new role at Albertsons, Iyengar is responsible for leading all aspects of digital marketing including loyalty programs, shopper marketing and the overall digital presence, as well as the e-commerce business, including home delivery.

“After being relatively unaffected by digital for many years, the grocery industry is starting to see several parts of the customer journey being transformed by digital. In this context, we need to continue to enhance our digital capabilities,” Iyengar said.

Albertsons growth plan is multi-faceted and includes organic growth through new ground up shopping centers, as well as acquisition of existing operating or closed retail facilities.

Publix is set to open 20 new stores this year, with Wegmans planning a similar expansion, primarily in East Coast suburban communities. Kroger plans to open 55 stores and Sprouts is scoping for 40 new locations nationwide. German grocer Aldi has announced a $3.4 billion remodel of its existing storefronts together with a U.S. expansion that will add 900 new locations by 2022. Another German chain, Lidl has initiated an aggressive entry into the U.S., with plans for 100 East Coast locations by the middle of next year, according to Aaron Martens, research analyst for Marcus & Millichap Research Services.

Target Corp. (NYSE:TGT) is looking to open 100+ new small-format stores in urban and dense suburban areas -- a market penetration similar to Whole Foods.

Walmart this year is slowing its new store opening expansions in favor of growing comparable store and club sales and e-commerce. Still, in the first quarter of this year it opened or expanded 305 stores. That compares to 588 in the same quarter a year ago.

July 20, 2017

By Randyl Drummer

Investors continued to buy less commercial real estate in both the second quarter and the first half of 2017 compared to the same periods a year ago, a trend that started in 2016 as steady fundamentals that have resulted in generally robust occupancies and rental rate gains have boosted valuations across most property types.

However, CRE investment sales are still running about 10% above the historical sales volume average over the past 10 years, according to preliminary U.S. investment sales data collected by CoStar's nationwide research team. In the second quarter, preliminary volume fell to $106.7 billion compared with $129.2 billion in second-quarter 2016.

The lodging property sector saw the biggest decline in the first half of the year compared with hotel property sales in the same period in 2016, including a significant drop in the second quarter from year-prior totals. Retail and multifamily also post sales volume declines of more than 20% in the first six-month period of 2017.

The drop-off in U.S. apartment transaction volume from previous peak levels is consistent with slowing rent growth and the market's perception of oversupply, particularly at the top of the multifamily market, noted CoStar research strategist John Affleck.

That being said, even as buyers and sellers have continued to benefit from low interest rates, which supported the trading volume among all types of commercial property that resulted in the record-shattering pace of the last two years. With interest rate beginning to trend upward, the low-financing advantage enjoyed by property investors is expected to gradually diminish in coming quarters.

"Higher interest rates have investors reevaluating commercial real estate’s core appeal this cycle: a wide spread in a low-yield world," Affleck added. "The maturity of the economic cycle and the new administration also raise uncertainty."

While industrial sales volume declined by double digits in the second quarter, the warehouse and light industrial market ended the first half of this year with the smallest decline among the major property types.

Conversely, office sales volume was roughly even in the second quarter of 2017 compared with the same period a year earlier, and was down only slightly in the first half compared to the first two quarters of last year and down by an even lower percentage for the trailing four-quarter period ending June 30, 2017.

Despite the modest declines in the sales volumes, "indications from our clients, especially lenders, are that the pipeline for 2017 is very strong for the remaining part of the year," said Walter Page, CoStar director of U.S. Research, office.

Page also noted that office sales over the past year don't factor in an additional $30 billion in new office real estate expected to deliver in 2017 due to the 90 million square feet of expected office deliveries within the top 54 U.S. metros.

"While the sales data is tracking property sales, the true level of capital transactions would count new construction as well," Page added.

U.S. office fundamentals are tracking at a steady and balanced clip, with average vacancy holding at about an average 10.2% for each of the last four quarters, Page noted.

"The last time we had four quarters in a row with the same vacancy rate was back in 2003 and 2004, when vacancy was 12.5%," Page said, adding that CoStar's forecast calls for vacancy to remain in the 10.2% to 10.5% range until 2019 as delivery of new office supply is expected to track with demand and net absorption.

The preliminary data shows both suburban and CBD office properties logged increases in the average price per square foot between the first and second quarters of 2017, according to CoStar Vice President of Research Dean Violagis.

Industrial: E-Commerce Continues to Drive Warehouse Demand

Likewise, the U.S. logistics and light-industrial property market remains in healthy balance, with more than $33 billion in U.S. industrial sales recorded in the first half, down only slightly from the same period in 2016.

Logistics occupancies have seen little change over the past few quarters, ending the second quarter of 2017 at 93.4% as second-quarter absorption totaled a strong 42.8 million square feet, driving the 12-month trailing average to 182.3 million square feet.

Strong interest from the capital markets should keep industrial yields low, even in the face of rising interest rates, Lupton concluded.

Retail: Store Closures Affecting Investor Appeal

The ongoing spate of store closure announcements this year have had a measurable impact on the liquidity of U.S. retail properties, with investment volume decreasing by significant percentages in the second quarter and first half of 2017 compared to the same period a year earlier, according to CoStar Portfolio Strategy managing consultant Ryan McCullough.

The retail market posted its second straight quarter of flat fundamentals in the second quarter, with vacancies holding at 5.2%. Demand has lagged behind supply growth since the start of the year as the market officially transitions to a "late expansion" phase in the real estate cycle, lowering rent growth expectations for landlords, McCullough said. However, the announced closures by dozens of national chains, including Sears, Kmart, Macy's, JC Penney, RadioShack, Payless ShoeSource and most recently, Gymboree, have not had a similar effect on pricing, McCullough noted.

Retail property pricing has increased by 8.5% over the past four quarters, according to the equal-weighted CoStar Commercial Repeat Sale Index (CCRSI).

"This divergence is perhaps an indication that investors taking a more critical eye toward asset quality, being more selective about acquisition targets but still valuing performing assets highly," McCullough said.

Both composite indices within the CoStar Commercial Repeat-Sale Index (CCRSI) posted gains in May, even as slower growth at the top end of the CRE market continued while overall absorption moderated and transaction volume continued to trend downward.

The equal-weighted U.S. Composite Index, which reflects more numerous but lower-priced property sales typical of secondary and tertiary markets, increased 1.3% in May, contributing to an annual gain of 16.7% in the 12-month period ending in May 2017.

Meanwhile, the value-weighted U.S. Composite Index, which reflects the larger asset sales common in core markets, advanced by just 0.3% in May, for a total 4.8% gain for the 12-month period ending in May.

July 5, 2017

Monogram Residential Trust, Inc. (NYSE: MORE), an owner and operator of apartment communities primarily located in coastal markets, agreed to be acquired by a newly formed perpetual life fund, Greystar Growth and Income Fund, led by Greystar Real Estate Partners in a transaction valued at $3 billion, including debt to be assumed or refinanced.

Based in Plano, TX, Monogram owns a portfolio of investments in 49 multifamily communities in 10 states totaling 13,674 units.

A ranking of the largest US apartment owners by the National Multifamily Housing Council for 2017 lists Charleston, SC-based Greystar as the 19th largest owner with 44,037 units. Greystar is also ranked as the largest apartment manager with 415,634 units under management.

Under the agreement, which was unanimously approved by Monogram's board, stockholders will receive $12 per share in cash, a premium of 22% to Monogram's closing stock price of $9.80 on July 3.

The $3 billion value includes Monogram's share of its two institutional co-investment joint ventures with PGGM and NPS. The PGGM joint venture will be restructured, and the joint venture interests held by NPS will be purchased by Greystar under a separate assignable purchase and sale agreement for approximately $500 million.

"Through this transaction, Monogram will transition from being a publicly traded REIT to a privately held company and a part of the Greystar organization,” Mark T. Alfieri, CEO of Monogram wrote to employees yesterday announcing the news. “We believe this transaction provides our stockholders with immediate and compelling value for their investment, and reflects the hard work and dedication of all the employees at Monogram.”

"We are excited to add Monogram's high quality assets in some of the best markets in the country as the seed portfolio for Greystar Growth and Income Fund, LP, our flagship core-plus perpetual life vehicle," said Bob Faith, the founder and chairman of Greystar.

The transaction is not contingent on receipt of financing by Greystar. JPMorgan Chase Bank, N.A. has provided a commitment letter to Greystar Growth and Income Fund for $2 billion in debt financing for the transaction.

The Greystar fund retained Walker & Dunlop Inc. (NYSE: WD) to secure financing for its acquisition. This will be the largest transaction in Walker & Dunlop's history.

Apartment REIT valuations stand near all-time highs, despite steady new supply that remains a near term headwind, according to initial analysis of the deal by Morgan Stanley Research.

“We think the transaction continues to illustrate that private investors are looking past near term supply headwinds and are more optimistic about the longer term outlook given supportive fundamentals,” Morgan Stanley Research reported.

Morgan Stanley is serving as exclusive financial advisor. Morrison & Foerster is representing Morgan Stanley in the financing. Goodwin Procter LLP is serving as legal advisor to Monogram. J.P. Morgan Securities LLC is serving as exclusive financial advisor and Jones Day is serving as legal advisor to Greystar.

The transaction, which is expected to close in the second half of 2017, is subject to approval by Monogram's stockholders and other customary closing conditions.

The Future of Autonomous Driving is Coming Down the Road Fast with Major Implications for Real Estate

June 14, 2017

Intel CEO Brian Krzanich has a warning for companies and industries that haven't started to prepare for the next big tech disruptor -- don't wait.

“Companies should start thinking about their autonomous driving strategy now,” said Krzanich, who ranks the fast-developing technology on par with the rise of personal computing, the internet and smartphones for its potential impact on traditional business models.

"Less than a decade ago, no one was talking about the potential of a soon-to-emerge app or sharing economy because no one saw it coming. This is why we started the conversation around the passenger economy early, to wake people up to the opportunity streams that will emerge when cars become the most powerful mobile data generating devices we use, and people swap driving for riding.”

The new study, which was sponsored by Intel and prepared by Strategy Analytics, explores the potential economic impact and industry shifts when today’s drivers become passengers and cars are controlled by an app.

"Autonomous driving and smart city technologies will enable the new passenger economy, gradually reconfiguring entire industries and inventing new ones thanks to the time and cognitive surplus it will unlock," according to the study, which predicts the resulting productivity gains and related economic impacts will grow from $800 billion in 2035 to $7 trillion by 2050.

While the report does not directly address the impact on real estate, the scenarios from driverless technology it raises will clearly shake up the real estate landscape.

For one, what will people do with all the extra time? Self-driving vehicles are expected to free more than 250 million hours of commuting time per year in the most congested cities in the world.

Other highlights of future scenarios raised by a future of autonomous vehicles that could very much impact the CRE business include:

Major impact on architecture, business design and urban planning as less space is devoted to accommodating parking facilities and roads in buildings and urban cores.

Driverless delivery vehicles transporting goods between distribution centers and retail outlets could take much of the cost out of bridging the current 'last mile' challenge between retailers and consumers.

Fast-casual dining or remote vending services could extend the reach of Starbucks or the local vegan restaurant beyond their brick and mortar locations.

While some of the future scenarios sound like science fiction, the driverless car is already here and many of the largest technology and mobility companies are already placing their bets, according to Intel.

Mercedes-Benz is already giving test rides in its app-powered F 015 Luxury in Motion research vehicle. Google has already logged about 1.3 million miles on its driverless cars in Mountain View, CA, where it is headquartered. General Motors is now testing its self-driving Bolt in Arizona. Audi, recently received a permit from California to test self-driving cars on public roads and BMW and Nissan have joined Mercedes-Benz in announcing plans to offer cars with self-driving capabilities by 2020.

This week, Apple CEO Tim Cook briefed Bloomberg on its big push into self-driving technology, which it aptly named Project Titan. Cook confirmed that Apple had initially been seeking to build its own car, but has now given that up as being overly complex and instead is focusing on developing the underlying technology and software used in future autonomous vehicles.

"There is a major disruption looming there,” Cook said.

The center of gravity in the car business may well have already shifted from Motown to Mountain View, says auto industry analyst Justin Toner.

“Taken to the extreme, I believe that autonomous cars will eradicate automobile accidents, eliminate traffic and significantly reduce the real estate dedicated to automobiles, freeing land for more productive use,” Toner says.

From a planning perspective, driverless cars are expected to increase the efficiency of roadways by traveling closer together and in narrower lanes, requiring significantly less road space than cars today. By some estimates, autonomous vehicles could support the same amount of traffic volume as error-prone, human-driven cars on one-quarter of the road space.

More Use, Less Parking

According to some estimates, cars are parked and not in use on average 95% of the time. The U.S. is estimated to have more than 800 million parking spaces, nearly four spaces for each vehicle.

If people move away from private car ownership to adopt the shared-use model, autonomous cars would likely be on the go more frequently, and require fewer parking spaces. And parking designated for autonomous cars could be located in a central area away from the core downtowns, allowing buildings to devote more space to accommodating people and less to accommodating cars.

Norman Foster, chairman and founder of the architecture firm Foster & Partners, told a crowd at a Wired Business Conference, last week that if he could design Apple’s recently constructed headquarters in Cupertino all over again, he would take into account “the changing patterns of transportation.”

Apple’s headquarters feature a massive underground garage built to hold 11,000 vehicles. Today, that’s an amenity, Foster said, but not too far in the future, it’s entirely possible that cars (and garages) will be far less important.

"Maybe the conventional garage needs to be re-thought and re-thought now,” Foster continued. “Maybe if I had a second time around I’d be putting a lot of persuasive pressure to say, ‘Make the floor-to-floor of a car park that much bigger, so if you’re not going to be filling it with cars in the future you could more easily retrofit it for more habitable space.”

Major Disruptions Also Can Be Costly

While much of the attention garnered by the autonomous driving technology is focused on the potential for good, including improved safety, greater efficiency and productivity gains, and any major disruption is also accompanied by costly and sometimes painful adjustments.

While it will take years for AV tech-driven cars to dominate the roadways, planners are concerned the convergence of autonomous vehicles, electrification and shared mobility has the potential to create a whole new wave of automation-induced sprawl without proper planning, regulations and incentives for people to keep riding buses and trains.

“Streets are 25 to 35 percent of a city’s land area... [the] most valuable asset in many ways,” Zabe Bent, a principal at transportation consulting firm Nelson\Nygaard and a speaker at the American Planning Association’s annual conference last month told the online housing site. “We need to really think about how we manage those spaces for the public good and for reducing congestion.”

Service Stations, Parking Facilities on Cutting Edge

Cleveland-based TravelCenters of America (Nasdaq: TA), the largest full-service travel center company in the U.S., also raised the issue of disruptive technologies in the energy or transportation industries to its investors.

“Various technologies are being developed in the energy and transportation industries that, if widely adopted, may materially harm our business,” the company reported. “For example, electric truck engines do not require diesel fuel and hybrid electric-diesel/gasoline engines may require substantially less diesel/gasoline fuel per mile driven. Further, driverless truck technologies may result in fewer individual truck drivers on the U.S. interstate highways and reduce the customer traffic and sales at our locations.”

And while driverless cars will still have to park somewhere, owners and operators of parking facilities are definitely on the cutting edge of this new technology.

Las Vegas-based MVP REIT, a nontraded REIT that primarily invests in parking facilities, recently added a new risk disclosure to its annual report, noting that changing lifestyles and technology innovations such as driverless vehicles may decrease the need for parking spaces, and could affect the value of its properties.

Big Picture Poses Net Gain for Real Estate

However, with the recent advent of Uber and other ride-sharing services, most owners and investors in commercial real estate see the emergence of autonomous cars as a net gain for real estate.

While zoning and transportation requirements will have to be addressed in order to realize the promise posed by AV and driverless cars, senior managers at several REITs are already bracing for the impact of the new technology.

"Driverless cars will eliminate the need for parking garages and de-urbanize our cities again,” Steven Grimes, CEO of Retail Properties of America (NYSE:RPAI) told investors last month. “Disruption is undeniably fixating. In some shape or form, all of us are discerning whether we are experiencing a normal course end of cycle disruption or the beginnings of a secular change in our space,” he added. “We think it’s both.”

"The handwriting is on the wall," said Chris Volk, CEO of Store Capital Corp. (NYSE:STOR). "After all, we're writing 15- to 20-year leases in a world where most pundits see the inception of driverless cars within five years."

May 25, 2017

Members of U.S. Congress Asking for More National Security Risk Assessment of Deals

As investors from China continue to splurge on US commercial real estate, concern is rising in Washington DC over the potential implications this deluge might be having on national security.

To ensure that those implications are being fully considered, this week Senate Banking Committee Ranking Member Sherrod Brown, D-OH, together with Sen. Ron Wyden, D-OR, ranking member on the Senate Finance Committee, and Sen. Claire McCaskill, D-MO., ranking member on the Homeland Security and Government Affairs Committee, requested that the Government Accountability Office investigate how the Committee on Foreign Investment in the United States (CFIUS) examines U.S. real estate transactions involving foreign investors.

The senators’ request calls for GAO to assess whether CFIUS is adequately equipped to identify, evaluate and, when appropriate, mitigate national security risks arising from the “rising tide” of foreign investment in US real estate.

In their letter, the senators note that additional national security considerations may be introduced by the fact that several senior administration officials, including the president, retain ownership of significant real estate holdings and maintain multiple residences that could be the subject of foreign acquisitions in the future.

"Foreign investors are pouring more and more money into the U.S. real estate market, and yet the trail behind these transactions is often shrouded in secrecy," Sen. Wyden said. "It is critical that we have a better understanding of how U.S. agencies identify and address national security threats that may arise in connection with foreign real estate investments."

"We know that real estate deals are one of the favored ways to launder illicit finances," Sen. Brown said. "But we don’t know if our oversight agencies have the resources and tools they need to vet Russian, Chinese, and other foreign investments in U.S. real estate for potential threats to our nation's security."

The senators' request follows a significant increase in foreign investment in U.S. commercial properties, and a pair of recent, but ultimately unsuccessful, high-profile real estate transactions involving Chinese insurance conglomerate Anbang that raised national security concerns.

Total Chinese direct investment in US real estate and hospitality is nearly $30 billion, accounting for over 27% of total Chinese investment since 1990, according to a recent report from the National Committee on U.S.-China Relations, an organization that promotes constructive U.S.-China relations founded in 1966.

This investment has taken place almost entirely after 2010 and is largely concentrated in major urban markets including New York, Los Angeles, Chicago, and San Francisco, according to a new report. By comparison, US investors have made just over $17 billion in direct investments into Chinese real estate and hospitality assets since 1990.

In a sign of the recent increased investment flow into US real estate, ElmTree Funds LLC, a private equity real estate firm based in St. Louis, announced this week that it has secured a $950 million investment from China Life Insurance Group, the largest financial insurer in China, to acquire a 95% interest in 48 single-tenant industrial, office and health care properties totaling more than 5.5 million square feet. The tenants include industrial manufacturers, credit processing facility operators, credit data aggregators, and US government agencies among other tenants.

However, Chinese investors believe US scrutiny of foreign investments is more than adequate, and in their opinion, quite stringent. Tu Guangshao, vice chairman and president of China Investment Corp. (CIC), the country’s official sovereign wealth fund with $810 billion in assets, recently presided over the official opening of CIC's first US office in New York City.

In an exclusive interview published in the Wall Street Journal this week, Guangshao, whose fund spent $1.7 billion on Manhattan real estate last year, said his firm “might do more US deals if controls were less stringent.”

Guangshao cited the “overly strict scrutiny and opaque investment-review process” that the US government has applied to foreign investors as an impediment to having more Chinese funding directed into American projects. To date, none of CIC's real estate investments have been rejected by CFIUS.

Another active overseas investor from China, Anbang Insurance, which was recently punished by Chinese regulators for improper fund-raising practices, has had two deals run afoul of US authorities. The insurer had its attempted acquisition of the Hotel del Coronado in San Diego blocked by CFIUS last year, which said the famous seaside resort is located near a major US naval base.

Anbang’s attempted $1.6 billion acquisition of US insurer Fidelity & Guaranty made it past CFIUS, but foundered when the company declined to give adequate details of its ownership structure to regulators in New York and Iowa where Fidelity & Guaranty has offices.

In an alert to their clients, the law firm of Kirkland & Ellis said the recent letter sent by the senators to GAO reflects concerns by other member of Congress regarding CFIUS’ review of transactions in other sectors including finance, transportation, and manufacturing.

The GAO has until May 31, to decide whether to accept or decline the senators’ request for the study.

"Irrespective, the letter illustrates the breadth of topics that are top of mind for members of Congress and other government stakeholders with respect to foreign investment in the United States,” Kirkland & Ellis said.

The law firm cited the following as key takeaways from the letter sent by the senators to the GAO:

Seemingly benign real estate assets may be deemed “sensitive” due to their proximity to U.S. government or military sites, and/or its tenant base. The letter requests GAO’s views on how CFIUS determines if a real estate transaction would provide a foreign buyer with either physical or cyber access to U.S. government personnel and systems.

Complex transaction structures and opaque beneficial ownership chains can create risk. The letter noted that U.S. regulators have been increasingly concerned about “the proliferation of transactions involving shell companies” and the use of real estate investments “as a conduit for money laundering and other illicit activities.”

Opaque nature of Chinese investment firms active in U.S. real estate engenders skepticism. China is the only foreign country cited in the letter, which specifically notes that the “ownership structure and political ties of some prominent Chinese investors . . . are murky at best.”

Office Lease Up (April 10) HSBC Inks 548,000-SF Renewal at North American Headquarters

APRIL 14, 2017

HSBC USA NA, a subsidiary of international banking and financial services organization HSBC Bank, has signed a five-year lease renewal totaling 548,000 square feet in its North American headquarters building at 452 Fifth Ave. in New York City.

The 30-story, 865,000-square-foot, 4-Star office tower was built in 1984 on 1.1 acres in the Penn Plaza / Garment District submarket of Manhattan, between 39th and 40th Streets.

PBC USA Real Estate LLC and Koor Industries Ltd. purchased the asset in a 2010 sale-leaseback deal with HSBC Bank for $330 million, or $382 per square foot, and has since completed a multi-million dollar capital improvement campaign that wrapped in 2012.

Investopedia Plans To Open New 16,000-SF HQs

APRIL 14, 2017

Investopedia, one of the largest online providers of financial education in the world, inked a deal for 15,931 square feet of office space at 114 W. 41st St. in Midtown Manhattan.

Investopedia is expected to be in their new space encompassing the entire eighth floor by the end of this year.

"Investopedia has experienced incredible growth over the last two years and we were reaching capacity in our current office," said Investopedia CEO, David Siegel. "We needed a new space that would not only accommodate us in the short-term, but enable us to continue our rapid expansion while offering a collaborative workplace environment."

The 22-story tower at 114 W. 41st totals about 350,000 square feet. The building sports fresh storefronts with full height glass façade, modernized elevators, state of the art security and a renovated lobby offering entrance from both 41st and 40th streets.